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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1 TO ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999
CUBIST PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 22-3192085
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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24 EMILY STREET, CAMBRIDGE, MA 02139
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(617) 576-1999
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-X is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the registrant's common stock, $.001 par value
per share ("Common Stock"), held by non-affiliates of the registrant as of March
8, 2000 was approximately $1,177,965,152, based on 22,653,176 shares held by
such non-affiliates at the closing price of a share of Common Stock of $52.00 as
reported on the Nasdaq National Market on such date. Affiliates of the Company
(defined as officers, directors and owners of 10 percent or more of the
outstanding share of Common Stock) owned 705,878 shares of Common Stock
outstanding on such date. The number of outstanding shares of Common Stock of
the Company on March 8, 2000 was 23,359,054.
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CUBIST PHARMACEUTICALS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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ITEM PAGE
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PART I
1 Business.................................................... 3
2 Description of Property..................................... 31
3 Legal Proceedings........................................... 31
4 Submission of Matters to a Vote of Security Holders......... 31
PART II
Market For Registrant's Common Stock and Related Stockholder
5 Matters..................................................... 32
6 Selected Financial Data..................................... 34
Management's Discussion and Analysis of Financial Condition
7 and Results of Operations................................... 35
Quantitative and Qualitative Disclosures About Market
7A Risk........................................................ 41
8 Financial Statements........................................ 42
Changes in and Disagreements With Accountants on Accounting
9 and Financial Disclosure.................................... 66
PART III
10 Directors and Executive Officers of the Registrant.......... 67
11 Executive Compensation...................................... 75
Security Ownership of Certain Beneficial Owners and
12 Management.................................................. 78
13 Certain Relationships and Related Transactions.............. 80
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form
14 8-K......................................................... 81
Signatures.................................................. 87
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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This annual report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding our drug development and
discovery programs, clinical trials, receipt of regulatory approval, capital
needs, collaborative agreements, intellectual property, expectations and
intentions. Forward-looking statements may be identified or qualified by words
such as "likely," "will," "suggests," "may," "would," "could," "should,"
"expects," "anticipates," "estimates," "plans," "projects," "believes," or
similar expressions and variants of those words or expressions.
Forward-looking statements necessarily involve risks and uncertainties, and
our actual results could differ materially from those anticipated in the
forward-looking statements due to a number of factors, including those set forth
above under "Risk Factors" and elsewhere in this annual report. The factors set
forth above in the "Risk Factors" section and other cautionary statements made
in this annual report should be read and understood as being applicable to all
related forward-looking statements wherever they appear in this annual report.
The forward-looking statements contained in this annual report represent our
judgment as of the date of this annual report. We caution readers not to place
undue reliance on such statements. We undertake no obligation to update publicly
any forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
Information regarding market and industry statistics contained in this
annual report is included based on information available to us that we believe
is accurate. It is generally based on academic and other publications that are
not produced for purposes of securities offerings or economic analysis. We have
not independently verified that data and cannot assure you of the accuracy of
the data we have included.
PART I
ITEM 1. BUSINESS
CORPORATE OVERVIEW
Cubist Pharmaceuticals, Inc. is a specialty pharmaceutical company focused
on the research, development and commercialization of new antimicrobial drugs to
combat serious and life-threatening bacterial and fungal infections, including
those caused by bacteria and fungi resistant to commercially available drugs. We
are evaluating in Phase II and Phase III clinical trials the safety and efficacy
of daptomycin, our lead product candidate and the first member of a new class of
antimicrobial drug candidates called lipopeptides. Assuming the successful
completion of Phase III clinical trials, we plan to file with the United States
Food and Drug Administration by mid-2001 a New Drug Application containing data
based on the treatment of approximately 1,200 patients with daptomycin.
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Our research and drug discovery activities are focused on the identification
of additional drug candidates from the lipopeptide class and from entirely new
classes of antimicrobial drug candidates. We utilize our proprietary Validation
IN VIVO of Targets and Assays for Antiinfectives, or VITA, functional genomics
technology and our proprietary ChemInformatics technology to accelerate the
discovery of new antimicrobial drugs, and we seek to license these technologies
on a non-exclusive basis to pharmaceutical and biotechnology companies.
OVERVIEW OF INFECTIOUS DISEASE AND DRUG RESISTANCE
Infectious diseases are caused by pathogens present in the environment, such
as bacteria and fungi, that enter the body through the skin or mucous membranes
of the lungs, nasal passages or gastrointestinal tract, and overwhelm the body's
immune system. These pathogens then establish themselves in various tissues and
organs throughout the body and cause a number of serious and, in some cases,
lethal infections, including those of the bloodstream, skin and soft tissue,
heart, lung and urinary tract.
According to a Centers for Disease Control and Prevention, or CDC, report
based on 1992 data, infectious diseases remained the leading cause of death
worldwide. According to industry sources, in 1997 the global systemic antibiotic
market was valued at $23.4 billion and there were at least 15 antimicrobials
with more than $400 million in annual sales worldwide. Emerging infections
contribute substantially to the ongoing burden of infectious disease in the U.S.
According to a 1994 CDC report, infectious diseases account for 25% of all
visits to physicians each year, and antimicrobial agents are the second most
frequently prescribed class of drugs. Over the past several years, there has
been a rise in the incidence of infectious diseases caused by bacteria and fungi
that have developed resistance to existing antimicrobial drugs. Annual direct
medical costs due to U.S. hospital-based infections reached $4.5 billion in
1992, according to the CDC. The increasing prevalence of drug-resistant
bacterial and fungal pathogens has led to significantly higher mortality rates,
prolonged hospitalizations, and higher health care costs from infectious
disease.
Antimicrobial drugs have, in many cases, proven highly successful in
controlling the serious morbidity and mortality that accompany these infections.
These drugs work by binding to specific targets in a bacterial or fungal
pathogen, thereby inhibiting a cell function essential to the cell's survival.
During the 1970's and the 1980's, many antimicrobials were developed and
introduced into the market. Most of these antimicrobials were from existing
antimicrobial classes such as semi-synthetic penicillins, cephalosporins,
macrolides, quinolones and carbapenems. Many of these antimicrobials proved to
be effective in treating infectious diseases and pharmaceutical companies
shifted their resources to other areas of drug discovery and development. As a
result, no antimicrobial agents have been introduced from a new chemical class
in over 25 years.
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Over the past several years there has been a rise in the incidence of
serious and life-threatening infections caused by Gram-positive bacteria,
particularly in hospital patients. Gram-positive and Gram-negative bacteria have
fundamentally different cell surface characteristics. These cell surface
characteristics greatly affect the ability of an antibiotic to penetrate the
bacteria and reach its target site. The rising incidence of serious and
life-threatening infections in hospitals is believed to be caused by the
changing nature of the hospital patient population and by the emergence of
bacteria and fungi that are resistant to existing antimicrobial drugs.
In recent years, the proportion of hospital patients that have compromised
immune systems has risen sharply. This trend is the result of, among other
things, the rising incidence of cancer and the associated use of chemotherapy,
the general aging of the patient population and the increased use of complex
surgical procedures such as organ transplants. Hospital patients with
compromised immune systems are more susceptible to serious and life-threatening
infections.
The rise in the incidence of infectious diseases caused by bacteria and
fungi that have developed resistance to existing antimicrobial drugs is a
natural outcome of the use and overuse of antimicrobial drugs. When bacteria or
fungi are exposed to an antimicrobial drug, the drug kills or inhibits the
growth of the susceptible pathogen. However, any variant in the bacterial
population that has spontaneously undergone a genetic change that confers drug
resistance will have a selective growth advantage, known in evolutionary terms
as natural selection. Thus, the antimicrobial drug does not cause the resistance
but creates an environment in which the resistant pathogen can multiply in the
presence of the drug, increasing the population of the resistant pathogen and
making it the predominant pathogen. These resistant pathogens can then spread
rapidly throughout the community.
Certain pathogens have developed resistance to all currently available
drugs. Examples of such Gram-positive resistant pathogens include:
- METHICILLIN RESISTANT STAPHYLOCOCCUS AUREUS, OR MRSA: STAPHYLOCOCCUS
AUREUS is a common bacterial pathogen that causes serious and
life-threatening infections, and routinely acquires characteristics of
drug resistance, virulence and toxicity. MRSA strains can cause severe
tissue damage to existing wounds and bacteremia, which have a high
mortality rate.
- VANCOMYCIN RESISTANT ENTEROCOCCI, OR VRE: The emergence of VRE strains in
the 1990's has led to infections for which only very limited commercially
available therapy exists. Hospital-based VRE has continued to rapidly rise
resulting in increased mortality rates.
- GLYCOPEPTIDE INTERMEDIATELY SUSCEPTIBLE STAPHYLOCOCCUS AUREUS, OR GISA:
The first reports of STAPHYLOCOCCUS AUREUS infections with decreased
susceptibility to vancomycin use occurred in 1998. Such bacterial strains
have been found in a wide geographical area throughout Japan and North
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America. The medical community expects that fully drug resistant
STAPHYLOCOCCUS AUREUS strains will emerge from GISA as additional
resistance to vancomycin use develops.
SHORTCOMINGS OF CURRENT THERAPIES
Current therapies do not provide adequate treatment for some serious and
life-threatening infections for the following reasons:
- Some existing antimicrobial drugs do not kill the pathogens that cause the
infection but merely inhibit their growth thereby allowing the immune
system to destroy the pathogen. These kinds of growth-inhibiting
antimicrobial drugs are less effective in immunocompromised patients
because their weakened immune systems cannot rid their bodies of the
pathogens.
- Many antimicrobials are effective against some serious and
life-threatening infections but not others. This may be because the
antimicrobial drug is not active against a particular type of pathogen or
because a strain of this pathogen has developed resistance to the
antimicrobial drug. Many of the serious and life-threatening infections
occur in hospital patients whose immune system is compromised. These
infections are complicated and may be caused by more than one kind of
pathogen. In addition, since these infections are life-threatening,
physicians treating these patients cannot wait for the test results
necessary to identify the exact nature of the pathogen or pathogens
causing the infection.
- Some pathogens have become resistant to all antimicrobials and there are
no available antimicrobial drugs to treat effectively the infections
caused by these drug-resistant pathogens. Vancomycin is the current
treatment of choice for patients that have serious and life-threatening
infections that have failed to respond to all other antimicrobials.
However, it has been widely reported in recent years that several strains
of enterococci have developed resistance to vancomycin. Currently, there
are only very limited commercially available therapeutic alternatives to
treat these strains of VRE.
- Many existing antimicrobial drugs used to treat serious and
life-threatening infections are difficult or inconvenient to administer.
Most of these antimicrobial drugs must be administered multiple times a
day in order to be effective, are not well tolerated by patients or
require lengthy infusion times when administered in a single daily dose.
Moreover, intravenous administration of some of these antimicrobial drugs
does not occur through the veins in the arm but through catheters in the
central venous system. The difficulty or inconvenience of administration
of these drugs make them less attractive choices for home therapy or other
therapy outside the hospital.
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- Existing antimicrobial drugs may cause side effects in some patients, such
as severe allergic reaction, lower blood pressure, inflammation and
swelling at the site of injection and headaches. Some of these side
effects may be significant enough to require that therapy be discontinued.
OUR BUSINESS STRATEGY
Our objective is to be the worldwide leader in the discovery and development
of new antimicrobial drugs to combat serious and life-threatening bacterial and
fungal infections, including those caused by drug-resistant pathogens. The
principal elements of our strategy to achieve this objective include the
following:
DEVELOP AND COMMERCIALIZE DAPTOMYCIN. We are developing daptomycin to treat
serious and life-threatening bacterial infections, including those caused by
drug-resistant pathogens. Assuming the successful completion of Phase III human
clinical trials, we intend to file a new drug application with the FDA by
mid-2001. We have the exclusive right to develop, manufacture and market
daptomycin, and are evaluating strategies for its worldwide commercialization.
LICENSE NEW DRUGS AND NEW DRUG CANDIDATES. Our internal expertise allows us
to recognize viable licensing opportunities and to save time and money in
successfully developing antimicrobials by capitalizing on the research initially
conducted and funded by others. We intend to continue to review and acquire
compounds with promising characteristics as antimicrobial drug candidates.
DISCOVER AND DEVELOP NEW ANTIMICROBIAL DRUGS. We focus our research and
drug discovery activities on identifying new classes of antimicrobial drugs and
on developing one or more antimicrobial drugs from each of these new classes. We
believe that antimicrobial drugs from new classes will be effective against
drug-resistant bacterial and fungal pathogens because these pathogens have not
had an opportunity to evolve resistance specific to these drugs. We have a
research and development effort underway focused on a new class of
antimicrobials called lipopeptides. Daptomycin is a member of the lipopeptide
class and, as a result of our work with daptomycin, we have developed expertise
in the chemistry and biology of lipopeptides. Our proprietary lipopeptide
program is focused on identifying new lipopeptide antimicrobial compounds for
the treatment of a broad spectrum of serious and life-threatening bacterial
infections.
UTILIZE OUR VITA FUNCTIONAL GENOMICS AND CHEMINFORMATICS TECHNOLOGIES TO
ACCELERATE THE DISCOVERY OF ANTIMICROBIAL DRUGS. We utilize our VITA and
ChemInformatics technologies in our internal research programs to identify novel
compounds with a broad spectrum of activity against life-threatening infectious
organisms such as MRSA and VRE. Our VITA and ChemInformatics technologies
accelerate the generation of leads for medicinal chemistry programs resulting in
faster development of antimicrobial drugs and lower costs by efficiently using
resources throughout the drug discovery process.
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LICENSE OUR VITA FUNCTIONAL GENOMICS AND CHEMINFORMATICS TECHNOLOGIES TO
PHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES. We plan to continue to generate
revenues by licensing on a non-exclusive basis our VITA functional genomics and
ChemInformatics technologies as drug discovery platform technologies.
DAPTOMYCIN
OVERVIEW. Daptomycin is the first member of a new class of antimicrobial
drugs called lipopeptides. Under laboratory conditions, or IN VITRO, daptomycin
rapidly kills all clinically significant Gram-positive bacteria, including the
resistant strains of VRE, MRSA and GISA. The Gram-positive bacteria targeted by
daptomycin cause serious infections, including endocarditis or infection of the
valves of the heart, osteomyelitis or infection of bone or bone marrow,
complicated skin and soft tissue infections, bacteremia, complicated urinary
tract infections and pneumonias. We are evaluating the efficacy and safety of
daptomycin in a clinical program with Phase II and Phase III trials currently
underway. We have exclusive rights to manufacture and market daptomycin, which
we in-licensed from Eli Lilly & Company in November 1997.
DAPTOMYCIN ADVANTAGES. We believe that daptomycin will provide the
following key benefits:
- ACTIVE AGAINST GRAM-POSITIVE BACTERIA. Daptomycin is effective IN VITRO
against all clinically significant Gram-positive bacteria, including VRE,
MRSA and GISA. We believe that daptomycin's broad spectrum of action gives
it a therapeutic advantage in treating serious and life-threatening
infections because daptomycin can be used to treat these infections
regardless of which bacterium is causing the infection.
- RAPIDLY KILLS BACTERIA. Daptomycin rapidly kills all clinically
significant Gram-positive bacteria IN VITRO. We believe this gives
daptomycin a therapeutic advantage in treating serious and
life-threatening infections, particularly in patients that have
compromised immune systems, as compared to antimicrobial drugs whose
mechanism of action is not to kill bacteria but to inhibit their growth
allowing the immune system to destroy the bacteria. Use of one of these
growth-inhibiting antimicrobial drugs to treat serious and
life-threatening infections is riskier because, even if the antimicrobial
drug works, it is possible that the immune system will not be able to
destroy the bacteria causing the infection. This is particularly a concern
in the case of hospital patients with compromised immune systems.
- EFFECTIVE AGAINST DRUG-RESISTANT BACTERIA. Daptomycin is effective IN
VITRO against drug-resistant bacteria, including VRE. Vancomycin is the
current treatment of choice for patients that have serious Gram-positive
infections that have failed to respond to all other antimicrobials.
However, several strains of enterococci have developed resistance to
vancomycin. Currently, there are only
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very limited therapeutic alternatives to treat these strains of VRE. We
believe that daptomycin will become the therapy of choice to treat
infections caused by drug-resistant bacteria.
- EASE OF ADMINISTRATION. Daptomycin is a very potent antibiotic and is
effective and well tolerated when administered in a single daily dose.
Daptomycin is administered intravenously in approximately 30 minutes.
Daptomycin will have an advantage over several other antimicrobial drugs
that require administration in multiple doses each day, that take longer
than 30 minutes to administer or that are administered through a central
venous catheter located in parts of the body other than the arm.
- SAFETY. In our clinical trials to date, daptomycin had a favorable safety
profile. Specifically, observed side effects in patients treated with
daptomycin included gastrointestinal and musculoskeletal events and were
comparable to those observed in patients treated with standard therapy. In
our clinical trials to date, no patients suffered side effects related to
daptomycin that were significant enough to require that therapy be
discontinued.
DAPTOMYCIN CLINICAL DATA. In the late 1980's Eli Lilly conducted 19 Phase I
safety trials and 2 Phase II efficacy and dosing trials of intravenous
daptomycin for the treatment of skin and soft tissue infections and bacteremia.
A total of 352 patients participated in these trials. The results of these
trials showed that daptomycin had safety and efficacy comparable to standard
therapies.
On the basis of daptomycin's IN VITRO activity against clinically
significant bacteria, its bacteria-killing mode of action and its promising
profile in the Eli Lilly Phase I and Phase II trials, we began further clinical
evaluation of intravenous daptomycin. In December 1998, we filed an
Investigational New Drug Application, or IND, with the FDA and began Phase II
and Phase III trials in February 1999 in order to evaluate the safety and
efficacy of intravenous daptomycin in patients with complicated skin and soft
tissue infections and in patients with bacteremia.
On March 5, 2000, we presented the results from two dose-ranging Phase II
open-label trials at the CDC's conference on Nocosomial and
Healthcare-Associated Infections. The objective of these Phase II trials was to
investigate dose selection based on clinical efficacy and safety. The first
trial was focused on patients diagnosed with bacteremia. The second trial was
focused on patients who had failed or were unable to tolerate other therapies
for the treatment of serious Gram-positive infections, including bacteremia,
complicated skin and soft tissue, complicated urinary tract infection,
intra-abdominal infection and pneumonia. The Phase II trial data combined for
both studies included 56 patients and showed that daptomycin administered
once-a-day at 4 mg/kg had a 91% clinical success rate. In addition, daptomycin
administered once-a-day at 4 mg/kg demonstrated an 86% clinical success rate in
the subset of patients infected with a vancomycin-resistant pathogen or who were
refractory or intolerant to vancomycin.
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Daptomycin also had a favorable safety profile similar to standard therapies.
Specifically, observed side effects in patients treated with daptomycin included
gastrointestinal and musculoskeletal events and were comparable to those
observed in patients treated with standard therapy.
DAPTOMYCIN CLINICAL PLAN. The clinical plan for daptomycin is designed to
enroll a sufficient number of patients necessary for the safety and efficacy
analysis to obtain FDA approval. The following table shows our clinical studies
currently underway and planned.
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GEOGRAPHIC
INFECTION STATUS TIMING SCOPE
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Bacteremia Phase II Clinical Trial Commenced in 2Q:99 U.S.
Resistant, Refractory Phase II Clinical Trial Commenced in 2Q:99 U.S.
or Contraindicated
Complicated Skin Phase III Clinical Trial Commenced in 2Q:99 U.S.
and Soft Tissue
Complicated Skin Phase III Clinical Trial Expected to Commence in International
and Soft Tissue 1Q:00
Complicated Urinary Tract Phase III Clinical Trial Expected to Commence in Worldwide
1H:00
Endocarditis Phase II/III Clinical Expected to Commence in U.S.
Trial 1H:00
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We are considering additional clinical trials designed to expand the
indications and commercial opportunity for daptomycin to other clinical
applications, including osteomyelitis and pneumonias. As part of our NDA filing
strategy, we are also currently planning several additional Phase I trials,
including studies on patients with impaired kidney function.
OUR LIPOPEPTIDE PROGRAM
Daptomycin is the first member of a new class of antibacterials called
lipopeptides. With traditional classes of antimicrobials, such as the
penicillins, multiple antimicrobial drugs have been developed. Therefore, we
expect there will be additional clinically useful lipopeptides with the
potential for commercialization. We are engaged in a comprehensive lipopeptide
drug discovery and development program based on our expertise on the chemistry
and biology of lipopeptides that we have acquired through our development work
with daptomycin. We have initiated a research program focused on the design,
synthesis and evaluation of new lipopeptides with improved properties over
daptomycin including increased potency,
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spectrum of activity and enhanced safety profile. We have filed multiple patent
applications on several different series of novel analogs. We expect to select a
novel lipopeptide IND candidate by the end of 2000.
Our long-term goal is to achieve a greater understanding of the mechanism of
action of lipopeptides and to apply this information to drug discovery.
Currently, we are engaged in a diverse set of activities to identify the
lipopeptide antibacterial molecular targets, and understand the nature of their
interaction with daptomycin.
OUR DRUG DISCOVERY PROGRAMS AND TECHNOLOGIES
Our drug discovery programs are focused on the design, synthesis and
evaluation of new broad-spectrum antimicrobials which act on novel molecular
targets from clinically relevant pathogens. These efforts rely heavily on our
VITA and ChemInformatics technologies. We expect that our drug discovery
programs will yield multiple lead compound series that can enter medicinal
chemistry programs by the end of 2000.
We are developing and implementing novel technologies to accelerate the
process of drug discovery. To discover new antimicrobials for clinical
development, our discovery platform integrates the scientific disciplines and
technologies required for target validation and assay development,
high-throughput screening and medicinal chemistry.
OUR PROPRIETARY VITA FUNCTIONAL GENOMICS TECHNOLOGY
Our Validation IN VIVO of Targets and Assays for Antiinfectives, or VITA,
technology is a functional genomics tool that quickly generates biological
information useful for identifying the most valuable drug discovery targets from
clinically important pathogens such as STAPHYLOCOCCUS AUREUS. The technology
allows validated targets to be rapidly enabled for high-throughput screening
assays used for the identification of quality lead compounds for medicinal
chemistry programs. VITA is broadly applicable to both validation IN VIVO and
screening IN VITRO of drug discovery targets with diverse functions, including
those targets which the scientific community has not previously been able to
screen.
An antimicrobial drug acts during an infection by binding to a specific
target and inhibiting its function. Target inhibition leads to impaired pathogen
growth or pathogen cell death; consequently the infected subject survives the
infection. The method by which novel targets are validated by the VITA
technology is analogous to how an antibiotic inhibits its target during an
established infection. A target is validated if a causal link is established
between the target and a cellular response important in a disease process.
Utilizing VITA, a target is validated by initially identifying a peptide that
specifically binds to the target and subsequently regulating the production of
the peptide in the pathogen during an established infection in mice. If the
target is essential for pathogen survival, production of the peptide will
inhibit
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target function and prevent pathogen growth, and the mice will survive. If the
inhibition of the target is not essential for pathogen survival, the pathogen
will continue to thrive and the mice will die from the infection. The peptide
used to specifically inhibit the target can then be used in a high-throughput
screening assay to identify small molecule compounds. We have filed patent
applications in connection with our VITA technology. In February 1999, we
entered into a collaborative research and license agreement with Novartis in
which we granted Novartis a non-exclusive license to the VITA technology.
OUR PROPRIETARY CHEMINFORMATICS TECHNOLOGY
To enhance our ability to use high-throughput screening, data from
target-based assays, we have designed and implemented a discovery approach
called ChemInformatics. Industry-wide experience has demonstrated that having
high-throughput screening assays and large numbers of compounds to screen does
not consistently yield lead compounds suitable for medicinal chemistry. This
problem is especially acute in antimicrobials where, to be effective, lead
compounds need to be active against multiple pathogen species and to have
properties which permit pathogen cell wall penetration. Our ChemInformatics
approach bridges the gap between high-throughput screening and medicinal
chemistry and serves as the drug discovery engine that fuels our medicinal
chemistry programs. ChemInformatics integrates high-throughput screening,
enzymology, combinatorial chemistry and computational chemistry to generate
three-dimensional models that are predictive for biological activity. Using
these models, many novel series of compounds can be designed to have the proper
chemical properties to be antimicrobial agents. We are currently applying our
ChemInformatics technology to a number of different target-based programs that
utilize high-throughput screening. Our ChemInformatics technology has produced
two classes of novel antimicrobial compounds that have been exclusively licensed
to Merck.
HIGH-THROUGHPUT SCREENING
We utilize automation, robotics and assay technologies to perform
high-throughput screening of compound libraries to identify novel inhibitors.
Thousands of compounds a day may be screened in VITA-generated target-based and
whole cell assays. Inhibitors may be further characterized using our secondary
screening assays where increasingly stringent selection criteria are applied to
identify lead candidates with the greatest potential for successful medicinal
chemistry programs.
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MEDICINAL CHEMISTRY
Medicinal chemistry refers to an iterative process where lead series of
compounds are optimized to yield new drug candidates. We have implemented
systems that allow for the optimization of many series of compounds for any
given target. In each compound series, we place an emphasis on extensively
evaluating the profile of compounds including microbiological and IN VIVO
properties. Our integrated chemistry and biology teams focus on the key
parameters that need improvement for a series to advance to drug development. By
utilizing many chemical series for each target, we increase the chances that
these series will overcome the IN VIVO hurdles to preclinical development. To
accelerate this process, we have put into place high-throughput systems for
preparing, purifying and testing compounds.
OUR COLLABORATIVE AGREEMENTS
We seek to enter into drug discovery and development collaboration
agreements to discover and develop novel antimicrobials. To date, our
collaborations provide that preclinical and clinical development is to be
carried out by our collaboration partners. In addition to providing us with
funding, our collaborations give us access to libraries of diverse compounds and
to the clinical development, manufacturing and commercialization capabilities of
our corporate partners.
NOVARTIS
In February 1999, we entered into a research and license agreement with
Novartis to jointly use our proprietary VITA functional genomics technology to
validate and develop assays for antimicrobial targets and to jointly identify
new compounds for development as antimicrobial agents. Each of our compound
library and Novartis' compound library will be screened against these targets.
In connection with the collaboration, Novartis has made a $4.0 million equity
investment in us and has made research support payments to us. We have granted
to Novartis a non-exclusive license to use our VITA functional genomics
technology to discover and develop drugs and an exclusive license to
commercialize drugs resulting from this collaboration. Pursuant to the
collaboration, Novartis will pay us specified research payments and, if
scientific and development milestones are achieved, Novartis will make milestone
payments. In addition, Novartis will be required to pay royalties to us on
worldwide sales of any drug developed and commercialized from any compound or
products discovered or derived from this collaboration.
MERCK
In June 1996, we entered into a collaborative research and license agreement
with Merck pursuant to which Merck agreed to collaborate with us to discover and
develop novel antimicrobial drugs from leads obtained by screening three of our
aminoacyl-tRNA synthetase targets against Merck's compound library.
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In connection with the collaboration, Merck has made research support payments
and has paid technology licensing fees to us. In October 1997 we amended the
agreement to include new screening modules to the collaboration. In
August 1999, we amended the agreement to include in the collaboration two
chemical classes of compounds owned by us and designed through the application
of our ChemInformatics technology. We have granted Merck an exclusive worldwide
license to commercialize drugs resulting from this collaboration. If a drug is
successfully developed and commercialized pursuant to this collaboration, we
will be entitled to receive milestone payments from Merck and royalties on the
worldwide sales of such drug.
BRISTOL-MYERS SQUIBB
In June 1996, we entered into a collaborative research and license agreement
with Bristol-Myers Squibb pursuant to which each of us agreed to collaborate to
discover and develop novel antimicrobial drugs from leads obtained by screening
six of our aminoacyl-tRNA synthetase targets against Bristol-Myers Squibb's
compound library. Bristol-Myers Squibb's exclusive research period ended in
January 2000 and we are expecting to receive a report setting forth their
findings. Following January 7, 2000, Bristol-Myers Squibb's rights to continue
screening and research and development with respect to our targets under the
collaboration agreement continue on a non-exclusive basis. In connection with
the collaboration, Bristol-Myers Squibb has made a $4.0 million equity
investment in us and has made milestone and research support payments to us. We
have granted to Bristol-Myers Squibb an exclusive worldwide license to
commercialize drugs resulting from this collaboration. If a drug is successfully
developed and commercialized pursuant to this collaboration, we will be entitled
to receive milestone payments from Bristol-Myers Squibb and royalties on the
worldwide sales of such drug.
BIOTECHNOLOGY ALLIANCES
To expand our access to novel small molecule libraries and other
technologies for screening and target discovery, we have formed and are
currently engaged in alliances with biotechnology companies including Neurogen
Corporation, Phylos, Cetek Corporation, and Coelacanth Corporation.
PATENTS AND PROPRIETARY TECHNOLOGY
We seek to protect our cloned targets, expressed proteins, assays, organic
synthetic processes, lead compounds, screening technology and other technologies
by, among other things, filing, or causing to be filed on our behalf, patent
applications. We have eleven issued U.S. patents, eighteen pending U.S. patent
applications and six pending international patent applications. We have
licensed, from the Massachusetts Institute of Technology, three U.S. patents
related to research technologies. We have licensed from Eli
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Lilly a portfolio of six issued U.S. patents and seventy foreign patents related
to the composition, manufacture, administration and use of daptomycin. In
addition, we have filed a number of patent applications in our name relating to
the composition, manufacture, administration and use of daptomycin and other
lipopeptides. We cannot be sure that patents will be granted with respect to any
of our pending patent applications or with respect to any patent applications
filed by us in the future, nor can we be sure that any of our existing patents
or any patents that may be granted to us in the future will be commercially
useful in protecting our technology.
Our commercial success will depend in part on not infringing patents or
proprietary rights of others. We cannot be sure that we will be able to obtain a
license to any third-party technology we may require to conduct our business or
that if obtainable, such technology can be licensed at reasonable cost. Failure
by us to obtain a license to technology that we may require to utilize our
technologies or commercialize our products may have a material adverse effect on
our business, operating results and financial condition. In some cases,
litigation or other proceedings may be necessary to defend against or assert
claims of infringement, to enforce patents issued to us, to protect our trade
secrets, know-how or other intellectual property rights, or to determine the
scope and validity of the proprietary rights of third parties. Any potential
litigation could result in substantial costs to us and diversion of our
resources and could have a material adverse effect on our business, operating
results and financial condition. We cannot be sure that any of our issued or
licensed patents would ultimately be held valid or that efforts to defend any of
our patents, trade secrets, know-how or other intellectual property rights would
be successful. An adverse outcome in any such litigation or proceeding could
subject us to significant liabilities, require us to cease using the subject
technology or require us to license the subject technology from the third party,
which license may not be available, all of which could have a material adverse
effect on our business, operating results and financial condition.
Much of the know-how of importance to our technology and many of our
processes are dependent upon the knowledge, experience and skills, which are not
patentable, of key scientific and technical personnel. To protect our rights to
and to maintain the confidentiality of trade secrets and proprietary
information, we require employees, consultants and collaborators to execute
confidentiality and invention assignment agreements upon commencement of a
relationship with us. These agreements prohibit the disclosure of confidential
information to anyone outside our company and require disclosure and assignment
to us of ideas, developments, discoveries and inventions made by employees,
advisors, consultants and collaborators. We cannot be sure, however, that these
agreements will not be breached or that our trade secrets or proprietary
information will not otherwise become known or developed independently by
others.
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MANUFACTURING
We currently engage ACS Dobfar of Italy to manufacture bulk clinical grade
daptomycin drug substance for our clinical trials. We currently obtain our
finished clinical grade vialed formulation of daptomycin from Abbott
Laboratories (Hospital Products Division) and Chesapeake Biological
Laboratories.
In January 1999, we entered into a memorandum of understanding with DSM Fine
Chemicals B.V. pursuant to which DSM has agreed to manufacture and supply to us
bulk daptomycin drug substance for commercial purposes. Under the terms of the
memorandum of understanding, DSM is required to prepare its manufacturing
facility in Italy to manufacture bulk daptomycin drug substance in accordance
with Good Manufacturing Practices standards, and we will make a series of
scheduled payments to DSM over a five year period beginning in 2000 in order to
reimburse DSM for up to $5.9 million of the costs to be incurred by DSM in
connection with the preparation, testing and validation of its manufacturing
facility. In addition, we have agreed to make milestone payments to DSM if
specific phases of the preparation of its manufacturing facility are completed
within specified periods of time. The maximum amount of milestone payments that
we may be required to make to DSM will be $1.6 million. Upon completion of the
preparation of DSM's manufacturing facility and a determination by the FDA that
the manufacturing facility complies with Good Manufacturing Practices standards,
we will purchase minimum annual quantities of bulk daptomycin drug substance
from DSM over a five year period beginning in 2002.
In addition, we are conducting negotiations with ACS Dobfar to establish a
second source of manufacture and supply of bulk daptomycin drug substance for
commercial purposes, and in negotiations with Abbott and Chesapeake for the
provision of final vialed daptomycin commercial drug product.
We have no experience in clinical or commercial scale manufacture of
daptomycin, or any other drug. We currently rely on ACS Dobfar, Abbott and
Chesapeake for the manufacture of daptomycin for our clinical trials. Commercial
daptomycin and any other drugs we may commercialize, will have to be
manufactured in facilities and by processes which comply with FDA and other
regulations. It may take substantial time to begin producing antimicrobial drugs
in compliance with such regulations. If we are unable to establish and maintain
compliant manufacturing facilities within a planned time frame and costs
parameters, the development and sales of our products and our financial
performance may be adversely affected.
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SALES AND MARKETING
We have the exclusive right to develop, manufacture and market daptomycin
and intend to commercialize daptomycin worldwide. We are evaluating various
strategies for the worldwide commercialization of daptomycin. These possible
strategies include entering into the following:
- a global marketing partnership with a single pharmaceutical company;
- a series of regional marketing partnerships in North America, Europe,
Japan and other parts of the world with different pharmaceutical
companies; and
- a series of regional marketing partnerships in Canada, Europe, Japan and
other parts of the world, while retaining the right to market daptomycin
in the United States either through our own hospital-based sales force or
through contract sales organizations.
Even if we decide to enter into global or regional marketing partnerships, our
strategy is to retain a significant role in the marketing and commercialization
of daptomycin in the United States. We currently have no sales and marketing
capabilities.
OUR COMPETITION
Competition for daptomycin includes existing antimicrobial drugs that treat
serious infections and drug candidates known to be in clinical trials. There is,
however, no commercially available antimicrobial drug that kills the bacteria
that causes serious and life-threatening infections. Examples of competing drugs
and drug candidates include:
- Vancomycin, a generic antibacterial drug used in many cases to treat
drug-resistant pathogens;
- Synercid, a product of Aventis S.A., has obtained regulatory approval for
the treatment of VRE bacteremia through central venous line
administration; and
- Zyvox, a drug candidate of Pharmacia & Upjohn, Inc. being developed to
treat serious infections including VRE.
In the event that daptomycin obtains FDA approval, we will compete with
these and similar drugs and pharmaceutical companies for the sale of daptomycin
on the basis of safety and efficacy, ease of administration and price of the
particular product. In general, the biotechnology and pharmaceutical industries
are intensely competitive and subject to rapid and significant technological
change. Our competitors in the United States and elsewhere are numerous and
include, among others, major, multinational pharmaceutical and chemical
companies, specialized biotechnology firms and universities and other research
institutions. Many of these competitors employ greater financial and other
resources, including larger research and development staffs and more effective
marketing and manufacturing
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organizations, than we or our collaborative partners. Acquisitions of competing
companies and potential competitors by large pharmaceutical companies or others
could enhance financial, marketing and other resources available to such
competitors. As a result of academic and government institutions becoming
increasingly aware of the commercial value of their research findings, such
institutions are more likely to enter into exclusive licensing agreements with
commercial enterprises, including our competitors, to market commercial
products. We cannot be sure that our competitors will not succeed in developing
technologies and drugs that are more effective or less costly than any we are
developing or which would render our technology and future drugs obsolete and
noncompetitive.
In addition, some of our competitors have greater experience than us in
conducting preclinical and clinical trials and obtaining FDA and other
regulatory approvals. Accordingly, our competitors may succeed in obtaining FDA
or other regulatory approvals for drug candidates more rapidly than us.
Companies that complete clinical trials, obtain required regulatory agency
approvals and commence commercial sale of their drugs before their competitors
may achieve a significant competitive advantage, including patent and FDA
marketing exclusivity rights that would delay the market products. We cannot be
sure that drugs resulting from our research and development efforts, or from our
joint efforts with our collaborative partners, will be able to compete
successfully with competitors' existing products or products under development
or that they will obtain regulatory approval in the United States or elsewhere.
GOVERNMENT REGULATION
OVERVIEW
The development, manufacture and marketing of drugs, including antibiotics,
developed by us or our collaborative partners are subject to regulation by
numerous governmental agencies in the United States, principally the FDA, by
state and local governments, and in some instances by foreign governments.
Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations
promulgated thereunder, the FDA regulates the preclinical and clinical trials,
safety, effectiveness, manufacture, labeling, storage, record keeping,
distribution, and promotion of drugs. Product development and approval within
the FDA regulatory framework usually takes a significant number of years,
involves the expenditure of substantial capital resources and is uncertain.
FDA PROCESS
Before testing in the United States of any compounds with potential
therapeutic value in human test subjects may begin, stringent government
requirements for preclinical data must be satisfied. Preclinical testing
includes both IN VITRO and IN VIVO laboratory evaluation and characterization of
the safety and efficacy of a drug and its formulation. Preclinical testing
results obtained from studies in several animal
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species, as well as from IN VITRO studies, are submitted to the FDA as part of
an IND and are reviewed by the FDA prior to the commencement of human clinical
trials. These preclinical data must provide an adequate basis for evaluating
both the safety and the scientific rationale for the initial studies in human
volunteers. Unless the FDA objects to an IND, the IND becomes effective 30 days
following its receipt by the FDA. Once trials have commenced, the FDA may stop
the trials by placing them on "clinical hold" because of concerns about, for
example, the safety of the product being tested.
Clinical trials involve the administration of the drug to healthy human
volunteers or to patients under the supervision of a qualified investigator,
usually a physician, pursuant to an FDA-reviewed protocol. Human clinical trials
are typically conducted in three sequential phases, although the phases may
overlap with one another. Clinical trials must be conducted under protocols that
detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol must be submitted to
the FDA as part of the IND. Each clinical trial must be conducted under the
auspices of an Institutional Review Board which considers, among other things,
ethical factors, the safety of human subjects, the possible liability of the
institution and the informed consent disclosure which must be made to
participants in the clinical trial.
Phase I clinical trials represent the initial administration of the
investigational drug to a small group of healthy human subjects or, more rarely,
to a group of selected patients with the targeted disease or disorder. The goal
of Phase I clinical trials is typically to test for safety, dose tolerance,
absorption, biodistribution, metabolism, excretion and clinical pharmacology
and, if possible, to gain early evidence regarding efficacy.
Phase II clinical trials involve a small sample of the actual intended
patient population and seek to assess the efficacy of the drug for specific
targeted indications, to determine dose response and the optimal dose range and
to gather additional information relating to safety and potential adverse
effects.
Once an investigational drug is found to have some efficacy and an
acceptable safety profile in the targeted patient population, Phase III clinical
trials are initiated to establish further clinical safety and efficacy of the
investigational drug in a broader sample of the general patient population at
geographically dispersed study sites in order to determine the overall
risk-benefit ratio of the drug and to provide an adequate basis for product
labeling. The Phase III clinical development program consists of expanded,
large-scale studies of patients with the target disease or disorder, to obtain
definitive statistical evidence of the efficacy and safety of the proposed
product and dosage regimen. All of the phases of clinical studies must be
conducted in conformance with the FDA's bioresearch monitoring regulations.
All data obtained from a comprehensive development program including
research and product development, manufacturing, pre clinical and clinical
trials and related information are submitted in an
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NDA to the FDA and the corresponding agencies in other countries for review and
approval. In addition to reports of the trials conducted under the IND
application, the NDA includes information pertaining to the preparation of the
new drug or antibiotic, analytical methods, details of the manufacture of
finished products and proposed product packaging and labeling. Although the FDC
Act requires the FDA to review NDAs within 180 days of their filing, in practice
longer times may be required. The FDA also frequently requests that additional
information be submitted, requiring significant additional review time. Any of
our proposed products likely would be subject to demanding and time-consuming
NDA approval procedures in virtually all countries where marketing of the
products is intended. These regulations define not only the form and content of
safety and efficacy data regarding the proposed product but also impose specific
requirements regarding manufacture of the product, quality assurance, packaging,
storage, documentation and recordkeeping, labeling, advertising and marketing
procedures.
In some cases, drug approvals may proceed under the accelerated approval or
"fast track" provisions of the Food and Drug Administration Modernization Act.
The accelerated approval provisions largely codified FDA's accelerated approval
regulations. While the statutory provisions expand upon the regulations, FDA
continues to rely on its regulations to implement the statutory provision. The
accelerated approval regulations apply to products used in the treatment of
serious or life-threatening illnesses that appear to provide meaningful
therapeutic benefits over existing treatments. These regulations permit approval
of such products before clinical research is completed based on the product's
effect on a clinical endpoint or surrogate endpoint. When a product is approved
under the accelerated approval regulations, the sponsor may be required to
conduct additional adequate and well-controlled studies to verify that the
effect the surrogate endpoint correlates with improved clinical outcome or to
otherwise verify the clinical benefit. In the event such postmarketing studies
do not verify the drug's anticipated clinical benefit, or if there is other
evidence that the drug product is not shown to be safe and effective, expedited
withdrawal procedures permit the FDA, after a hearing, to remove a product from
the market. Significant uncertainty exists as to the extent to which these
accelerated approval regulations will result in accelerated review and approval.
FDA retains considerable discretion to determine eligibility for accelerated
review and approval.
OTHER REGULATORY PROCESSES
We are also subject to regulation under other federal laws and regulation
under state and local laws, including laws relating to occupational safety,
laboratory practices, the use, handling and disposition of radioactive
materials, environmental protection and hazardous substance control. Although we
believe that our safety procedures for handling and disposing of radioactive
compounds and other hazardous materials used in our research and development
activities comply with the standards prescribed by federal, state and local
regulations, the risk of accidental contamination or injury from these materials
cannot be
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completely eliminated. In the event of any such accident, we could be held
liable for any damages that result and any such liability could exceed our
resources.
OUR EMPLOYEES
As of March 3, 2000, we had 75 full-time employees, 60 of whom were engaged
in research and development and 15 of whom were engaged in management,
administration and finance. Doctorates are held by 25 of our employees. Our
employees are not covered by a collective bargaining agreement. We have never
experienced an employment-related work stoppage and we consider our employee
relations to be good.
RISK FACTORS
INVESTING IN OUR STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER
CAREFULLY THE RISKS DESCRIBED BELOW, TOGETHER WITH THE OTHER INFORMATION IN THIS
ANNUAL REPORT, BEFORE YOU MAKE A DECISION TO INVEST IN OUR COMMON STOCK. IF ANY
OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, OPERATING RESULTS OR
FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED. THIS COULD CAUSE THE
MARKET PRICE OF OUR COMMON STOCK TO DECLINE, AND COULD CAUSE YOU TO LOSE ALL OR
PART OF YOUR INVESTMENT.
RISKS RELATING TO OUR BUSINESS
OUR OPERATING RESULTS FOR THE FORESEEABLE FUTURE WILL DEPEND SIGNIFICANTLY ON
OUR ABILITY TO OBTAIN REGULATORY APPROVAL OF, AND TO SUCCESSFULLY COMMERCIALIZE,
DAPTOMYCIN.
Daptomycin is currently our only drug candidate in clinical trials. We will
not receive revenues or royalties from commercial sales of daptomycin or any
other drug in the foreseeable future, if at all.
Our development of daptomycin involves a high degree of risk. Many important
factors will affect our ability to successfully develop and commercialize
daptomycin, including our ability to:
- demonstrate safety and efficacy of daptomycin at each stage of the
clinical trial process;
- meet applicable regulatory standards and receive required regulatory
approvals;
- obtain and maintain necessary patents and licenses;
- produce daptomycin in commercial quantities at reasonable costs;
- obtain reimbursement coverage for daptomycin;
- compete successfully against other products; and
- market daptomycin successfully.
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We cannot be sure that we will successfully develop and commercialize
daptomycin or that we will obtain required regulatory approvals for its
commercialization. As a result, we may never generate revenues from daptomycin
sales.
WE HAVE INCURRED SUBSTANTIAL LOSSES IN THE PAST AND EXPECT TO INCUR ADDITIONAL
LOSSES OVER THE NEXT SEVERAL YEARS.
Since we began operations, we have incurred substantial net losses in every
fiscal period. We had net losses of $7.3 million in 1997, $11.8 million in 1998
and $17.8 million in 1999. We had an accumulated deficit of $52.6 million
through December 31, 1999. These losses have resulted principally from costs in
conducting research and development activities, commencing clinical trials and
associated administrative costs.
We expect to incur significant additional operating losses over the next
several years as we expand our research and development efforts, preclinical
testing and clinical trials and we implement manufacturing, marketing and sales
programs. As a result, we cannot predict when we will become profitable, if at
all, and if we do, we may not remain profitable for any substantial period of
time. If we fail to achieve profitability within the time frame expected by
investors, the market price of the common stock may decline.
WE DEPEND ON THIRD PARTIES FOR MANUFACTURING OF DAPTOMYCIN, AND OUR
COMMERCIALIZATION OF DAPTOMYCIN COULD BE STOPPED, DELAYED OR MADE LESS
PROFITABLE IF THOSE THIRD PARTIES FAIL TO PROVIDE US WITH SUFFICIENT QUANTITIES
AT ACCEPTABLE PRICES.
We have no experience in manufacturing. We lack the facilities and personnel
to manufacture products in accordance with the Good Manufacturing Practices
prescribed by the FDA or to produce an adequate supply of compounds to meet
future requirements for clinical trials and commercialization of daptomycin.
Drug manufacturing facilities are subject to an inspection before the FDA will
issue an approval to market a new drug product, and all of the manufacturers
that we intend to use must adhere to the current Good Manufacturing Practice
regulations prescribed by the FDA.
We depend entirely on one company, ACS Dobfar, to manufacture bulk
daptomycin drug substance for our clinical trials, and on two companies, Abbott
Laboratories (Hospital Products Division) and Chesapeake Biological
Laboratories, to manufacture clinical grade vialed formulation of daptomycin. We
have entered into a memorandum of understanding with DSM Fine Chemicals to
manufacture and supply to us bulk daptomycin drug substance for commercial
purposes. We are in negotiations with ACS Dobfar to establish a second source of
manufacture and supply of bulk daptomycin drug substance for commercial
purposes, and in negotiations with Abbott and Chesapeake for the manufacture and
supply of final vialed daptomycin commercial drug product. We may not be able to
enter into definitive agreements with DSM,
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ACS Dobfar, Abbott or Chesapeake on acceptable terms for the commercial scale
manufacturing of daptomycin. If we are unable to do so, or if we are required to
transfer manufacturing processes to other third-party manufacturers, we would be
required to satisfy various regulatory requirements and we could experience
significant delays in supply. If we are unable to maintain, develop or contract
for manufacturing capabilities on acceptable terms at any time, our ability to
conduct clinical trials and to make any commercial sales would be adversely
affected.
IF WE ARE UNABLE TO DEVELOP SATISFACTORY SALES AND MARKETING CAPABILITIES, WE
MAY NOT SUCCEED IN COMMERCIALIZING DAPTOMYCIN OR ANY OTHER PRODUCT CANDIDATE.
We have no experience in marketing and selling drug products. We have not
entered into any arrangements for the sale and marketing of daptomycin. We may
seek to collaborate with a third party to market our drugs or may seek to market
and sell our drugs by ourselves. If we seek to collaborate with a third party,
we cannot be sure that a collaborative agreement can be reached on terms
acceptable to us. If we seek to market and sell our drugs directly, we will need
to hire additional personnel skilled in marketing and sales. We cannot be sure
that we will be able to acquire, or establish third-party relationships to
provide, any or all of these marketing and sales capabilities.
EVEN IF WE OBTAIN REGULATORY APPROVALS TO COMMERCIALIZE DAPTOMYCIN OR ANY OTHER
DRUG, OUR DRUG PRODUCTS MAY NOT BE ACCEPTED BY PHYSICIANS, PATIENTS, THIRD-PARTY
PAYORS OR THE MEDICAL COMMUNITY IN GENERAL.
We cannot be sure that daptomycin or any other drug successfully developed
by us, independently or with our collaborative partners, will be accepted by the
pharmaceutical market. Daptomycin and any future products we develop will
compete with a number of antimicrobial drugs manufactured and marketed by major
pharmaceutical companies. The degree of market acceptance of any drugs we
develop depends on a number of factors, including:
- our demonstration of the clinical efficacy and safety of our drugs;
- the advantages and disadvantages of our drugs compared to existing
therapies; and
- the reimbursement policies of government and third-party payors.
We cannot be sure that physicians, patients, third-party payors or the
medical community in general will accept and utilize any drugs we develop.
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OUR APPROACH TO DRUG DISCOVERY IS UNPROVEN, AND WE MAY NOT SUCCEED IN
IDENTIFYING ANY DRUG CANDIDATES WITH CLINICAL BENEFITS.
Our approach requires the development of multiple novel technologies to
create a successful drug candidate. While we have demonstrated that some
compounds have the ability to inhibit the activity of some molecular targets, we
have not proven that this activity can be utilized clinically as a therapeutic
drug. We cannot be certain that any preliminary potential demonstrated in
primary screening will continue to be encouraging in further screening or drug
discovery studies. We have not tested any drug candidates developed from our
drug discovery program in humans, and we cannot assure you that there will be
clinical benefits associated with any drug candidates we do develop. Our failure
to develop new drug candidates would have a material adverse effect on our
business, operating results and financial condition.
OUR RESEARCH AND DEVELOPMENT PROGRAM FOR DRUG PRODUCTS OTHER THAN DAPTOMYCIN IS
AT AN EARLY STAGE, AND WE CANNOT BE CERTAIN OUR PROGRAM WILL RESULT IN THE
COMMERCIALIZATION OF ANY DRUG.
Except for our development program for daptomycin, our research and
development program is at an early stage. To date, we have not, independently or
with our collaborative partners, optimized any lead drug candidates generated in
our research program. Any drug candidates we develop will require significant
additional research and development efforts prior to commercial sale, including
extensive preclinical and clinical testing and regulatory approval. This may
require increases in spending on internal projects, the acquisition of third
party technologies or products and other types of investments. We cannot be sure
our approach to drug discovery, acting independently or with our collaborative
partners, will be effective or will result in the development of any drug. We
cannot expect that any drug products that do result from our research and
development efforts will be commercially available for many years.
We have limited experience in conducting preclinical testing and clinical
trials. Even if we receive initially positive preclinical or clinical results,
those results will not mean that similar results will be obtained in the later
stages of drug development. All of our potential drug candidates are prone to
the risks of failure inherent in pharmaceutical product development, including
the possibility that none of our drug candidates will be:
- safe, non-toxic and effective;
- approved by regulatory authorities;
- developed into a commercially viable drug;
- manufactured or produced economically;
- successfully marketed; or
- accepted widely by customers.
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WE FACE SIGNIFICANT COMPETITION FROM OTHER BIOTECHNOLOGY AND PHARMACEUTICAL
COMPANIES, AND OUR OPERATING RESULTS WILL SUFFER IF WE FAIL TO COMPETE
EFFECTIVELY.
The biotechnology and pharmaceutical industries are intensely competitive.
We have many competitors both in the United States and internationally,
including major multinational pharmaceutical and chemical companies,
biotechnology companies and universities and other research institutions.
Competition for daptomycin, in particular, includes commercially available drugs
such as vancomycin, a generic antimicrobial drug, and drug candidates in
clinical development.
Many of our competitors have greater financial and other resources, such as
larger research and development staffs and more effective marketing and
manufacturing organizations. Our competitors may succeed in developing or
licensing on an exclusive basis technologies and drugs that are more effective
or less costly than any which we are currently developing, which could render
our technology and future drug products obsolete and noncompetitive. It is
possible for our competitors to obtain FDA or other regulatory approvals for
drug candidates before we can. In general, companies that begin commercial sale
of their drugs before their competitors have a significant competitive advantage
in the marketplace, including the ability to obtain patent and FDA marketing
exclusivity rights that would delay our ability to market specific products.
Even if our drug candidates are approved for sale, we may not be able to compete
successfully with competitors' existing products or products under development.
DECISIONS BY OUR COLLABORATIVE PARTNERS COULD IMPAIR OR PROHIBIT OUR DEVELOPMENT
OF NEW PRODUCTS AND OTHERWISE ADVERSELY AFFECT OUR REVENUES.
A key element of our strategy is to enhance our drug discovery and
development programs, and to fund a portion of our capital requirements, by
entering into collaborative agreements with pharmaceutical and biotechnology
companies. Our receipt of revenues, whether in the form of continued research
funding, drug development milestone payments or royalty payments on sales of
drugs, from these collaborative agreements is dependent upon the decisions made
by our collaborative partners. The amount and timing of resources dedicated by
our collaborative partners to their respective collaborations with us is not
under our control.
Some drug candidates discovered by us may be viewed by our collaborative
partners as competitive with their drugs or drug candidates. Accordingly, our
collaborative partners may not elect to proceed with the development of drug
candidates that we believe to be promising. In addition, our collaborative
partners may pursue their existing or alternative technologies in preference to
our drug candidates. As a result:
- the interests and goals of our collaborative partners might not always
coincide with ours;
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- some of our collaborative partners might develop independently, or with
others, drugs that could compete with ours; or
- disagreements over proprietary rights might lead to delays in research or
in the development and commercialization of product candidates and might
result in litigation or arbitration, either of which would be
time-consuming and expensive.
If any of our collaborative partners breaches or terminates its agreement
with us or otherwise fails to conduct its collaborative activities in a timely
manner:
- the development or commercialization of any drug candidate or research
program under these collaborative agreements may be delayed;
- we may be required to undertake unforeseen additional responsibilities or
to devote unforeseen additional resources to such development or
commercialization; or
- the development or commercialization could be terminated.
We cannot be sure that we will be able to establish additional collaborative
relationships on terms acceptable to us or to continue our existing
collaborative arrangements.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY RIGHTS.
Our success depends to a significant degree upon our ability to obtain
United States and foreign patent protection for our drug candidates and
processes, preserve our trade secrets, and operate without infringing the
proprietary rights of third parties. Legal standards relating to the validity of
patents covering pharmaceutical and biotechnological inventions, and the scope
of claims made under such patents, are still developing. Our patent position is
highly uncertain and involves complex legal and factual questions. We cannot be
certain that the named applicants or inventors of the subject matter covered by
our patent applications or patents, whether directly owned by us or licensed to
us, were the first to invent or the first to file patent applications for such
inventions. Third parties may challenge, infringe upon, circumvent or seek to
invalidate existing or future patents owned by or licensed to us. A court or
other agency with jurisdiction may find our patents unenforceable. Even if we
have valid patents, these patents still may not provide sufficient protection
against competing products or processes.
If our drug candidates or processes are found to infringe upon the patents
of others or are found to impermissibly utilize the intellectual property of
others, our development, manufacture and sale of our infringing drug candidates
could be severely restricted or prohibited. In this case, we may have to obtain
licenses from third parties to continue utilizing the patents or proprietary
rights of others. Obtaining these licenses may be expensive, if we are able to
obtain them at all. If we become involved in litigation involving
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our intellectual property rights or the intellectual property rights of others,
the potential costs of such litigation and the potential damages that we could
be required to pay could be substantial.
In addition to patent protection, we rely on trade secrets, proprietary
know-how, and confidentiality provisions in agreements with our collaborative
partners, employees and consultants to protect our intellectual property. We
also rely on invention assignment provisions in agreements with employees and
some consultants. It is possible that these agreements could be breached or that
we might not have adequate remedies for any such breaches. Third parties may
learn of or independently discover our trade secrets, proprietary know-how and
intellectual property, which could have a material adverse effect on our
business, financial condition and results of operations. Moreover, the laws of
foreign countries in which we market our drug products may afford little or no
effective protection of our intellectual property.
IF WE LOSE THE SERVICES OF SCOTT M. ROCKLAGE, PH.D., FRANCIS P. TALLY, M.D., OR
OTHER KEY PERSONNEL, OUR BUSINESS WILL SUFFER.
We believe that our ability to successfully implement our business strategy
is highly dependent on our senior management and scientific team, including
Scott M. Rocklage, Ph.D., our Chairman of the Board of Directors, Chief
Executive Officer and President, and Francis P. Tally, M.D., our Executive Vice
President, Scientific Affairs. Although Dr. Rocklage has entered into an
employment agreement with us, he may terminate his employment at any time upon
thirty days' written notice. No other senior executive officer or key employee
has entered into an employment agreement with us. Losing the services of one or
more of these individuals might hinder our ability to achieve our business
objectives.
WE MUST HIRE AND RETAIN QUALIFIED PERSONNEL IN A COMPETITIVE LABOR MARKET.
Our success in large part depends upon our ability to attract, train,
motivate and retain qualified scientific personnel. Qualified personnel are in
great demand throughout the biotechnology and pharmaceutical industries, and the
competition for these employees therefore is intense. If we fail to attract and
retain qualified personnel for our scientific and technical teams, the rate at
which we can discover, develop and commercialize drugs will be limited. This
could have a material adverse effect on our business, operating results and
financial condition.
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<PAGE>
WE MAY REQUIRE ADDITIONAL FUNDS.
We may require substantial additional funds in order to:
- finance our drug discovery and development programs;
- fund our operating expenses;
- pursue regulatory approvals;
- license or acquire additional drug candidates or technologies;
- develop manufacturing, marketing and sales capabilities; and
- prosecute and defend our intellectual property rights.
We intend to seek additional funding through public or private financing or
other arrangements with collaborative partners. If we raise additional funds by
issuing equity securities, further dilution to existing stockholders may result.
In addition, as a condition to giving additional funds to us, future investors
may demand, and may be granted, rights superior to those of existing
stockholders. We cannot be sure, however, that additional financing will be
available from any of these sources or, if available, will be available on
acceptable or affordable terms.
If adequate additional funds are not available, we may be required to delay,
reduce the scope of, or eliminate one or more of our research and development
programs. In order to obtain additional funding, we may be required to
relinquish rights to technologies or drug candidates that we would not otherwise
relinquish in order to continue independent operations.
WE COULD INCUR SUBSTANTIAL COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS
RELATING TO OUR DRUG PRODUCTS.
The nature of our business exposes us to potential liability risks inherent
in the testing, manufacturing and marketing of pharmaceutical products. Using
our drug candidates in clinical trials may expose us to product liability claims
and possible adverse publicity. These risks will expand with respect to drugs,
if any, that receive regulatory approval for commercial sale. Product liability
insurance is expensive and may not be available in the future. We cannot be sure
that we will be able to maintain or obtain insurance coverage at acceptable
costs or in a sufficient amount, that our insurer will not disclaim coverage as
to a future claim or that a product liability claim would not otherwise
adversely affect our business, operating results or financial condition.
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<PAGE>
OUR ABILITY TO GENERATE FUTURE REVENUES FROM DRUG PRODUCTS WILL DEPEND ON
REIMBURSEMENT AND DRUG PRICING.
Acceptable levels of reimbursement of costs of developing and manufacturing
of drugs and treatments related to those drugs by government authorities,
private health insurers and other organizations, such as HMOs, will have an
effect on the successful commercialization of, and attracting collaborative
partners to invest in the development of, our drug candidates. We cannot be sure
that reimbursement in the United States or elsewhere will be available for any
drugs we may develop or, if already available, will not be decreased in the
future. Also, we cannot be sure that reimbursement amounts will not reduce the
demand for, or the price of, our drugs. Any reduction in demand would adversely
affect our business. If reimbursement is not available or is available only to
limited levels, we may not be able to obtain collaborative partners to
manufacture and commercialize drugs, and may not be able to obtain a
satisfactory financial return on our own manufacture and commercialization of
any future drugs.
Third-party payors increasingly are challenging prices charged for medical
products and services. Also, the trend toward managed health care in the United
States and the concurrent growth of organizations such as HMOs, as well as
legislative proposals to reform health care or reduce government insurance
programs, may result in lower prices for pharmaceutical products, including any
products that may be offered by us in the future. Cost-cutting measures that
health care providers are instituting, and the effect of any health care reform,
could materially adversely affect our ability to sell any drugs that are
successfully developed by us and approved by regulators. Moreover, we are unable
to predict what additional legislation or regulation, if any, relating to the
health care industry or third-party coverage and reimbursement may be enacted in
the future or what effect such legislation or regulation would have on our
business.
RISKS RELATED TO GOVERNMENTAL APPROVALS
IF WE DO NOT OBTAIN REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET
DAPTOMYCIN OR ANY FUTURE DRUG CANDIDATES.
The FDA and comparable regulatory agencies in foreign countries impose
substantial requirements upon the commercial introduction of drug products to
establish their safety and efficacy. These include lengthy and detailed
preclinical, laboratory and clinical testing procedures, sampling activities and
other costly and time-consuming procedures. All of our drug candidates will
require governmental approvals for commercialization, none of which have been
obtained. Preclinical testing and clinical trials and manufacturing of our drug
candidates will be subject to rigorous and extensive regulation by the FDA and
corresponding foreign regulatory authorities. Satisfaction of these requirements
typically takes a significant number of years and can vary substantially based
upon the type, complexity and novelty of the product.
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We are currently testing daptomycin in human clinical trials to determine
whether daptomycin is safe and effective and, if so, to what degree. Many drugs
in human clinical trials fail to demonstrate the desired safety and efficacy
characteristics. Drugs in later stages of clinical development may fail to show
the desired safety and efficacy traits despite having progressed through initial
human testing. Our failure to demonstrate the safety and efficacy of daptomycin
could delay or prevent required approvals from regulatory authorities. This
would prevent us from commercializing daptomycin and would substantially impair
our business, operating results and financial condition. We cannot be sure when
we, independently or with our collaborative partners, might submit additional
drug candidates for FDA or other regulatory review. Government regulation also
affects the manufacturing and marketing of pharmaceutical products like ours.
The effects of governmental regulations may be to:
- delay the marketing of our potential drugs for a considerable or
indefinite period of time;
- impose costly procedural requirements upon our activities; and
- furnish a competitive advantage to larger companies or companies more
experienced in regulatory affairs.
Delays in obtaining governmental regulatory approval could adversely affect
our marketing as well as our ability to generate significant revenues from
commercial sales. We cannot be sure that FDA or other regulatory approvals for
any drug candidates developed by us will be granted on a timely basis or at all.
Moreover, if regulatory approval to market a drug candidate is granted, the
approval may impose limitations on the indicated use for which the drug may be
marketed.
WE HAVE LIMITED EXPERIENCE IN CONDUCTING THE PRECLINICAL AND CLINICAL TESTING
NECESSARY FOR US TO OBTAIN REGULATORY APPROVALS OF OUR DRUG CANDIDATES.
Before we receive regulatory approvals for the commercial sale of any of our
potential drugs, our drug candidates will be subject to extensive preclinical
testing and clinical trials to demonstrate their safety and efficacy in humans.
We depend on our collaborative partners to conduct clinical trials for the drug
candidates resulting from the collaborative agreements, and we may become
dependent on other third parties to conduct future clinical trials of our
internally developed drug candidates. We have limited experience in conducting
preclinical testing or clinical trials. Preclinical testing or clinical trials
have been commenced only with respect to daptomycin and not with respect to any
of our other drug candidates or any drug candidates being developed jointly by
us and our collaborative partners. Furthermore, we cannot be sure that
preclinical testing or clinical trials of any drug candidates will demonstrate
the safety and efficacy of our drug candidates at all or to the extent necessary
to obtain regulatory approvals. Companies
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in the biotechnology industry have suffered significant setbacks in advanced
clinical trials, even after demonstrating promising results in earlier trials.
The failure to demonstrate the safety and efficacy of a drug candidate under
development would delay or prevent regulatory approval of the drug candidate and
could have a material adverse effect on our business, operating results and
financial condition.
IF WE FAIL TO COMPLY WITH EXTENSIVE REGULATIONS AFTER ANY REGULATORY APPROVAL OF
A DRUG PRODUCT OR IF A REGULATORY AUTHORITY WITHDRAWS ITS APPROVAL OF A DRUG
PRODUCT, WE MAY BE FORCED TO SUSPEND THE SALE OF THE PRODUCT.
Even if initial regulatory approvals for our drug candidates are obtained,
our company, our drugs and the manufacturing facilities for our drugs would be
subject to continual review and periodic inspection. Later discovery of
previously unknown problems with a drug, manufacturer or facility may result in
restrictions on the drug, the manufacturer or us, including withdrawal of the
drug from the market. The FDA stringently applies regulatory standards. Failure
to comply can, among other things, result in fines, denial or withdrawal of
regulatory approvals, product recalls or seizures, operating restrictions and
criminal prosecution. In addition, our manufacturing facilities will be subject
to FDA inspections for adherence to Good Manufacturing Practices prior to
marketing clearance and periodically during the manufacturing process. The FDA
may also require post-marketing testing and surveillance to monitor the effects
of an approved product. In addition, if there are any modifications to a drug,
further regulatory approval will be required.
ITEM 2. DESCRIPTION OF PROPERTY
We are headquartered at 24 Emily Street in Cambridge, Massachusetts, where
we lease approximately 24,000 square feet of commercial space pursuant to a term
lease that expires in September 2003, subject to a 5-year renewal option. We
have leased an additional 11,000 square feet of commercial space at 125 Sydney
Street in Cambridge, Massachusetts, pursuant to a term lease that expires in
December 2003. These facilities are adequate for our current requirements.
ITEM 3. LEGAL PROCEEDINGS
We are not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Cubist's common stock is traded on the Nasdaq National Market under the
symbol "CBST". The following table sets forth, for the period indicated, the
high and low sale prices per share of Cubist's common stock as reported by the
Nasdaq National Market.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
Year Ended December 31, 1998:
First Quarter............................................. $ 5.75 $ 4.25
Second Quarter............................................ $ 5.69 $ 4.50
Third Quarter............................................. $ 4.69 $ 2.03
Fourth Quarter............................................ $ 3.81 $ 2.00
Year Ended December 31, 1999:
First Quarter............................................. $ 4.87 $ 2.68
Second Quarter............................................ $ 4.87 $ 2.87
Third Quarter............................................. $11.12 $ 2.93
Fourth Quarter............................................ $21.50 $ 7.37
Year Ended December 31, 2000:
First Quarter (through March 9, 2000)..................... $71.50 $16.25
</TABLE>
HOLDERS
As of March 9, 2000, Cubist had 309 stockholders of record. This does not
reflect persons or entitles who hold their stock in nominee or "street" name
through various brokerage firms.
DIVIDENDS
We have never declared or paid cash dividends on our capital stock and do
not anticipate paying any dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to operate and expand our business.
Our payment of any future dividends will be at the discretion of our board of
directors after taking into account various factors, including our financial
condition, operating results, cash
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<PAGE>
needs and growth plans. Our bank term loan contains a restrictive covenant that
prohibits us from paying cash dividends or making stock redemptions or
repurchases without the prior written consent of the lender bank.
RECENT SALES OF UNREGISTERED SECURITIES
Described below is information regarding all securities we sold during the
fiscal year ended December 31, 1999 and in January 2000, which, unless otherwise
noted below, were not registered under the Securities Act.
In January 2000, we issued and sold an aggregate of 2,200,000 shares of
common stock at a purchase price of $25.00 per share. The issuance and sale of
such shares of common stock were made in reliance on Rule 506 of Regulation D
promulgated under Section 4(2) of the Securities Act. The resale of these shares
was subsequently registered with the SEC.
In October 1999, we issued and sold an aggregate of 2,503,333 shares of
Common Stock at a purchase price of $7.50 per share. The issuance and sale of
such shares of common stock were made in reliance on Rule 506 of Regulation D
promulgated under Section 4(2) of the Securities Act. The resale of these shares
was subsequently registered with the SEC.
In February 1999, we issued and sold an aggregate of 797,448 shares of
common stock at a purchase price of $5.02 per share. The issuance and sale of
such shares of common stock were made in reliance on Section 4(2) of the
Securities Act.
Our initial Registration Statement on Form S-1 (Reg. No. 333-6795) in
connection with our initial public offering of common stock was declared
effective by the SEC on October 25, 1996. On October 25, 1996, we also filed
another Registration Statement on Form S-1 (Reg. No. 333-5880) with the SEC
pursuant to Rule 462 (b) promulgated under the Securities Act of 1933, as
amended. For ease of reference and clarity, the two registration statements
referred to in this paragraph and referred to in the following paragraphs
collectively as the "IPO Registration Statement". We registered 2,875,000 shares
of common stock under the Securities Act on our IPO Registration Statement.
The aggregate initial public offering proceeds for all 2,875,000 shares of
common stock registered by the IPO Registration Statement was $17,250,000. The
net proceeds from this issuance and distribution, after deducting the aggregate
amount of related expenses, including underwriting discounts and commissions we
paid were $15,154,000.
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<PAGE>
Through December 31, 1999 we spent all of the $15,154,000 net proceeds
received for the following uses and in the following amounts per use: $427,000
in construction of plant, building and facilities; $2,512,000 for repayment of
indebtedness; $12,215,000 for working capital. All amounts we spent for such
uses, other than payment of salaries to directors and officers, consisted of
direct payments to persons or entities, none of which was a director or officer,
holder of 10 percent or more of any class of equity securities or other
affiliate.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sponsored research revenues................... $ 1,271 $ 4,985 $ 2,733 $ 1,634 $ 5,353
------- ------- ------- -------- --------
Operating expenses:
Research and development expenses........... 4,965 6,871 9,341 10,489 19,351
General and administrative expenses......... 1,708 1,990 3,292 3,495 4,298
------- ------- ------- -------- --------
Total operating expenses................ 6,673 8,861 12,633 13,984 23,649
Interest income............................... 239 306 1,039 859 813
Interest expense.............................. (233) (229) (237) (334) (331)
Other income.................................. -- -- 1,833 -- --
------- ------- ------- -------- --------
Net loss.................................... $(5,396) $(3,799) $(7,265) $(11,825) $(17,814)
======= ======= ======= ======== ========
Basic and diluted net loss per common share... $ (5.47) $ (1.49) $ (0.73) $ (0.97) $ (0.99)
Weighted average number of common shares
outstanding for basic and diluted net loss
per common share............................ 986 2,554 9,995 12,224 18,041
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................... $3,056 $19,329 $ 9,547 $15,156 $26,151
Working capital................................. 3,215 18,020 8,238 13,645 23,046
Total assets.................................... 7,048 23,452 21,673 23,137 30,204
Long-term liabilities........................... 1,257 1,053 1,105 1,308 1,519
Stockholders' equity............................ 4,895 20,299 19,063 20,086 25,153
Dividends....................................... -- -- -- -- --
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS ANNUAL REPORT. THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS MAY
DIFFER SIGNIFICANTLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE FUTURE RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS ANNUAL REPORT. ALSO, SEE
"SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA."
OVERVIEW
Since our incorporation on May 1, 1992 and commencement of operations in
February 1993, we have been engaged in the research, development and
commercialization of novel antimicrobial drugs to combat serious and
life-threatening bacterial and fungal infections, including those caused by
bacteria and fungi resistant to commercially available drugs. We have a limited
history of operations and have experienced significant net losses since
inception. At December 31, 1999, we had an accumulated deficit of $52.6 million.
We expect to incur significant additional operating losses over the next several
years and expect cumulative losses to increase due to expanded research and
development efforts, preclinical testing and clinical trials and the development
of manufacturing, marketing and sales capabilities.
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In recent years we have enhanced our drug discovery and development programs
and funded a portion of our capital requirements, by entering into collaborative
agreements with pharmaceutical and biotechnology companies. We have entered into
collaborative agreements based specifically on our aminoacyl-tRNA synthetase
program with Merck and Bristol-Myers Squibb, and a collaborative agreement with
Novartis based on our VITA functional genomics technology. Under these
collaborative agreements, we have received sponsored research payments and, if
drug development milestones are achieved, we are entitled to milestone payments.
In addition, we will be entitled to receive royalties on worldwide sales of any
drug developed and commercialized from these collaborations. We have received
all of the sponsored research payments that we were entitled to under our
collaborative agreements with Merck and Bristol-Meyers Squibb, although Merck
and Bristol-Myers Squibb are still required to make milestone payments and pay
royalties to us for any drug developed and commercialized from these
collaborations.
On February 3, 1999, we entered into a collaborative research and license
agreement with Novartis Pharma AG to use our VITA functional genomics technology
to validate and develop assays for antimicrobial targets and to identify new
compounds for development as antimicrobial agents. In exchange for the license,
Novartis is making research payments and, if scientific and development
milestones are achieved, Novartis will make milestone payments to us. In
addition, Novartis will be required to pay royalties to us on worldwide sales of
any drug developed and commercialized from any products derived from this
collaboration. Upon the signing of the research and license agreement, Novartis
purchased, and we issued to Novartis, 797,448 shares of our common stock for a
total purchase price of $4.0 million in cash.
On November 7, 1997, we entered into a license agreement with Eli Lilly and
Company, pursuant to which we acquired exclusive worldwide rights to develop,
manufacture and market daptomycin. In exchange for such license, we paid to Eli
Lilly an upfront license fee in cash, and if drug development milestones are
achieved, have agreed to pay milestone payments in cash or by issuing shares of
our common stock to Eli Lilly. In addition, we will be required to pay royalties
to Eli Lilly on worldwide sales of daptomycin. On February 19, 1999, we issued
to Eli Lilly 56,948 shares of our common stock as a milestone payment which was
due upon commencement of Phase III clinical trials of daptomycin. The value of
the common stock issued was $250,000 and was recorded as research and
development expense.
In January 1999, we entered into a memorandum of understanding with DSM Fine
Chemicals B.V. pursuant to which DSM has agreed to manufacture and supply to us
bulk daptomycin drug substance for commercial purposes. Under the terms of the
memorandum of understanding, DSM is required to prepare its manufacturing
facility in Italy to manufacture bulk daptomycin drug substance in accordance
with Good Manufacturing Practices standards, and we will make a series of
scheduled payments to DSM over a five year period beginning in 2000 in order to
reimburse DSM for up to $5.9 million of the costs to be incurred
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<PAGE>
by DSM in connection with the preparation, testing and validation of its
manufacturing facility. In addition, we have agreed to make milestone payments
to DSM if specific phases of the preparation of its manufacturing facility are
completed within specified periods of time. The maximum amount of milestone
payments that we may be required to make to DSM is $1.6 million. Upon completion
of the preparation of DSM's manufacturing facility and a determination by the
FDA that the manufacturing facility complies with Good Manufacturing Practices
standards, we will purchase minimum annual quantities of bulk daptomycin drug
substance from DSM over a five year period beginning in 2002.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES. Total revenues in the year ended December 31, 1999, were
$5,353,000 compared to $1,634,000 in the year ended December 31, 1998, an
increase of $3,719,000 or 227.6%. The revenues earned in the year ended
December 31, 1999, consisted of $3,000,000 in research support funding from the
Bristol-Myers Squibb and Merck collaborations; $2,042,000 in research support
funding from the Novartis collaboration; and $311,000 in Small Business
Innovation Research funding. The revenues earned in the year ended December 31,
1998 consisted of $1,107,000 in research support funding from the Bristol-Myers
Squibb and Merck collaborations; and $528,000 in Small Business Innovation
Research funding. The increase in revenues in the year ended December 31, 1999
as compared to the year ended December 31, 1998 was primarily due to the
increase of milestone payments and research support funding from the Merck and
Novartis collaborations during 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development expenses
in the year ended December 31, 1999, were $19,351,000 compared to $10,489,000 in
the year ended December 31, 1998, an increase of $8,862,000 or 84.5%. The
increase was largely due to increased clinical and manufacturing costs related
to daptomycin development and the additional personnel and purchases that were
required by such development.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in
the year ended December 31, 1999, were $4,298,000 compared to $3,495,000 in the
year ended December 31, 1998, an increase of $803,000 or 23.0%. The increase was
largely due to increased investor and public relations expenses and increased
legal and other professional services expenses.
INTEREST INCOME AND EXPENSE. Interest income in the year ended
December 31, 1999, was $814,000 compared to $859,000 in year ended December 31,
1998, a decrease of $45,000 or 5.3%. The decrease in interest income was due
primarily to lower average cash, cash equivalent and investment balances during
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<PAGE>
the year ended December 31, 1999 as compared to the year ended December 31,
1998. Interest expense in the year ended December 31, 1999 was $331,000 as
compared to $334,000 during the year ended December 31, 1998, a decrease of
$3,000.
NET LOSS. Our net loss for the year ended December 31, 1999 was $17,814,000
compared to $11,825,000 during the year ended December 31, 1998, an increase of
$5,989,000 or 50.6%. The increase was primarily due to an increase in expenses
incurred associated with the development of daptomycin and increased costs
associated with our marketing and investor relations program.
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES. Total revenues in the year ended December 31, 1998, were
$1,634,000 compared to $2,733,000 in the year ended December 31, 1997, a
decrease of $1,099,000 or 40.2%. The revenues earned in the year ended
December 31, 1998 consisted of $1,107,000 in research support funding from the
Bristol-Myers Squibb and Merck collaborations; and $528,000 in Small Business
Innovation Research funding. The revenues earned in the year ended December 31,
1997, consisted of $2,025,000 in research support funding from the Bristol-Myers
Squibb, Merck and Pfizer collaborations; a $500,000 milestone payment from the
Bristol-Myers Squibb collaboration; and $208,000 in Small Business Innovation
Research funding. The decrease in revenues in the year ended December 31, 1998
as compared to the year ended December 31, 1997 was primarily due to the
decrease of research support funding from Merck during 1998; the decrease of
research support funding due to the termination of the Pfizer collaboration in
1997; and the lack of milestone payments from the Bristol-Myers Squibb
collaboration during 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development expenses
in the year ended December 31, 1998, were $10,489,000 compared to $9,341,000 in
the year ended December 31, 1997, an increase of $1,148,000 or 12.3%. The
increase was largely due to increased consulting and manufacturing costs related
to daptomycin development and the additional personnel and purchases that are
required by such development.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in
the year ended December 31, 1998 were $3,495,000 compared to $3,292,000 in the
year ended December 31, 1997, an increase of $203,000 or 6.2%. The increase was
largely due to increases in personnel costs, marketing and investor and public
relations expenses, and consulting and license expenses.
INTEREST INCOME AND EXPENSE. Interest income in the year ended
December 31, 1998 was $859,000 compared to $1,039,000 in year ended
December 31, 1997, a decrease of $180,000 or 17.3%. The decrease in interest
income was due primarily to lower average cash, cash and investment balances
during the year
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<PAGE>
ended December 31, 1998, as compared to the year ended December 31, 1997.
Interest expense in the year ended December 31, 1998 was $334,000 as compared to
$237,000 during the year ended December 31, 1997, an increase of $97,000 or
40.9%, due to additional leasing arrangements during the year.
OTHER INCOME. Other income in the year ended December 31, 1997, was
$1,833,000 and consisted entirely of gain on the sale of our equity position in
Novalon Pharmaceutical Corp.
NET LOSS. The net loss for the year ended December 31, 1998, was
$11,825,000 compared to $7,265,000 during the year ended December 31, 1997, an
increase of $4,560,000 or 62.8%. The increase was primarily due to the decreased
revenues in 1998, an increase in expenses incurred associated with the
development of daptomycin, and increased costs associated with our marketing and
investor relations program.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through the sale of equity
securities, equipment financing, sponsored research revenues, license revenues
and interest earned on invested capital. Our total cash, cash equivalent and
investments balance at December 31, 1999 was $26,151,000 compared to $19,012,000
at December 31, 1998 and $74,789,000 at February 29, 2000.
From inception through December 31, 1999, we had invested an aggregate of
$8,570,000 (of which $842,000 was invested during 1999) in property and
equipment, primarily in facility renovations and laboratory equipment under
capital leases. The obligations under capital leases at December 31, 1999 were
$1,294,000. Minimum annual principal payments due under capital leases total
$686,000 in 2000. Principal payments are scheduled to decline each year
thereafter until expiration in 2002. We made principal payments under our
capital lease obligations of $624,000 in the year ended December 31, 1999. We
expect our capital expenditures in 2000 to be approximately $2,000,000,
consisting of leasehold improvements and laboratory equipment purchases.
On September 23, 1998, we completed a private placement financing with
investors and raised net proceeds of $12.7 million by issuing 6,065,560 shares
of our common stock at $2.25 per share, along with 3,032,783 warrants
exercisable for our common stock at $2.25 per share. We have filed a
registration statement to register the resale of the 9,098,343 shares of our
common stock related to this financing.
During the twelve months ended December 31, 1999, we issued 285,644 shares
of our common stock upon the exercise of 326,668 warrants issued in connection
with the private placement financing completed on September 23, 1998. Such
warrants are exercisable at $2.25 per share or pursuant to a standard cashless
net issue provision. Of the 285,644 shares issued, 160,000 shares were issued
for an aggregate purchase
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<PAGE>
price of $360,000 and 125,644 shares were issued upon cashless net issue
exercise pursuant to which the holders of such warrants surrendered the right to
acquire 41,024 additional shares of our common stock.
Upon the signing of the research and license agreement with Novartis in
February 1999, we issued to Novartis, 797,448 shares of our common stock for a
total purchase price of $4.0 million in cash.
During March 1999, we entered into a term loan agreement with a bank under
which we are able to borrow up to $1,500,000 to finance fixed asset purchases.
Advances under this facility are to be repaid over a 36-month period, commencing
on March 31, 2000. Interest on the borrowings is at the bank's LIBOR rate (8.42%
at December 31, 1999). Borrowings under the facility are collateralized by all
capital equipment purchased with the funds under this term loan. At
December 31, 1999, borrowings outstanding totaled $1,139,578. We are currently
negotiating with our lender bank to enter into another term loan agreement under
which we will be able to borrow an additional $2,000,000 on terms similar to our
existing term loan agreement, to finance fixed asset purchases.
On October 21, 1999, we completed a private placement financing with
investors and raised net proceeds of $17.5 million by issuing 2,503,333 shares
of our common stock at $7.50 per share. We have filed a registration statement
to register the resale of the 2,503,333 shares of our common stock issued in
this financing.
On January 29, 2000, we completed a private placement financing with
investors and raised net proceeds of $52.0 million by issuing 2,200,000 shares
of our common stock at $25.00 per share. We have filed a registration statement
to register the resale of the 2,200,000 shares of our common stock issued in
this financing.
We filed a registration statement with the SEC on March 10, 2000 in
connection with a proposed public offering by us. The proposed public offering
will be underwritten on a firm-commitment basis. We will receive all of the net
proceeds of the proposed public offering. The net proceeds of the proposed
public offering, together with the net proceeds of our October 1999 private
placement and our January 2000 private placement, will be used to fund our
clinical trials and commercialization of daptomycin, our lipopeptide drug
discovery program, the continued development of our VITA functional genomics and
ChemInformatics technologies, working capital and other general corporate
purposes.
We believe that the additional funds from the sale of shares in the proposed
public offering, together with our existing cash resources and our existing
capital resources, interest income and future revenues due under our
collaborative agreements, will be sufficient to fund our operating expenses and
capital requirements as currently planned through at least March 31, 2001. Our
actual cash requirements may vary materially from those now planned and will
depend on numerous factors. We cannot be sure that our
40
<PAGE>
existing cash, cash equivalents, other capital resources, interest income and
future revenues due under our collaborative agreements will be sufficient to
fund our operating expenses and capital requirements during that period. In the
absence of the proposed public offering, we will need to raise substantial
additional capital to fund our operations from and after January 1, 2001, and
intend to seek such additional funding through public or private financing or
collaborative or other arrangements with corporate partners.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities," which was amended by SFAS No. 137 and is effective for
fiscal years beginning after June 15, 2000. The statement establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Adoption of this standard is not expected to have a material impact on our
financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," which is effective no later than the
quarter ending March 31, 2000. SAB 101 clarifies the SEC's views related to
revenue recognition and disclosure. We will adopt SAB 101 effective in the first
quarter of 2000 and are presently determining the effect it will have on our
financial statements, but management does not believe the effect will be
material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently own financial instruments that are sensitive to market risks as
part of our investment portfolio. Our investment portfolio is used to preserve
our capital until it is required to fund operations, including our research and
development activities. None of these market-risk sensitive instruments are held
for trading purposes. Our investment portfolio includes investment grade debt
instruments. These bonds are subject to interest rate risk, and could decline in
value if interest rates fluctuate. Due to the conservative nature of these
instruments, we do not believe that we have a material exposure to interest rate
risk. We do not own derivative financial instruments in our investment
portfolio.
41
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
CUBIST PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... 43
Balance Sheets as of December 31, 1998 and 1999............. 44
Statements of Operations for the years ended December 31,
1997, 1998 and 1999....................................... 45
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999....................................... 46
Statements of Changes in Stockholders' Equity for the years
ended December 31, 1997, 1998
and 1999.................................................. 48
Notes to Financial Statements............................... 49
</TABLE>
42
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Cubist Pharmaceuticals, Inc.:
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of Cubist Pharmaceuticals, Inc. as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 4, 2000
43
<PAGE>
CUBIST PHARMACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,463,688 $11,570,960
Short-term investments.................................... 8,692,514 14,580,515
Accounts receivable....................................... -- 87,431
Prepaid expenses and other current assets................. 231,409 339,081
----------- -----------
Total current assets.................................... 15,387,611 26,577,987
Property and equipment...................................... 7,727,821 8,437,830
Less: Accumulated depreciation and amortization............. (3,908,054) (4,990,943)
----------- -----------
Property and equipment, net............................... 3,819,767 3,446,887
Long-term investments....................................... 3,855,336 --
Other assets................................................ 74,238 179,287
----------- -----------
Total assets............................................ $23,136,952 $30,204,161
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 460,939 $ 1,299,139
Accrued expenses.......................................... 572,562 1,303,012
Current portion of long-term debt......................... 83,957 394,939
Current portion of capital lease obligations.............. 625,450 535,073
----------- -----------
Total current liabilities............................... 1,742,908 3,532,163
Long-term debt, net of current portion...................... 16,109 759,782
Long-term capital lease obligation, net of current
portion................................................... 1,292,165 758,821
----------- -----------
Total liabilities....................................... 3,051,182 5,050,766
----------- -----------
Commitments (Notes F, J, K & N)
Stockholders' equity:
Preferred stock, non-cumulative; convertible, $.001 par
value; authorized 5,000,000 shares 1998 and 1999; issued
and outstanding 1998 and 1999 no shares................. -- --
Common stock, $.001 par value; authorized 50,000,000
shares; issued and outstanding 1998 16,642,968 shares;
issued and outstanding 1999 20,523,358 shares........... 16,643 20,524
Additional paid-in capital................................ 54,890,014 77,767,268
Accumulated deficit....................................... (34,820,887) (52,634,397)
----------- -----------
Total stockholders' equity.............................. 20,085,770 25,153,395
----------- -----------
Total liabilities and stockholders' equity............ $23,136,952 $30,204,161
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
44
<PAGE>
CUBIST PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Sponsored research revenues.......................... $ 2,733,083 $ 1,634,199 $ 5,353,379
Operating expenses:
Research and development........................... 9,340,928 10,489,258 19,351,332
General and administrative......................... 3,292,241 3,495,264 4,297,723
----------- ------------ ------------
Total operating expenses......................... 12,633,169 13,984,522 23,649,055
Interest income...................................... 1,038,532 858,919 813,507
Interest expense..................................... (237,119) (333,602) (331,341)
Other income......................................... 1,833,334 -- --
----------- ------------ ------------
Net loss........................................... $(7,265,339) $(11,825,006) $(17,813,510)
=========== ============ ============
Basic and diluted net loss per common share.......... $ (0.73) $ (0.97) $ (0.99)
=========== ============ ============
Weighted average number of common shares outstanding
for basic and diluted net loss per common share.... 9,994,718 12,224,404 18,040,815
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
45
<PAGE>
CUBIST PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows for (from) operating activities:
Net loss.................................................. $(7,265,339) $(11,825,006) $(17,813,510)
Adjustments to reconcile net loss to net cash used in
operating activities:
Gain on sale of equity interest......................... (1,833,334) -- --
Amortization of equity interest......................... 833,334 -- --
Depreciation and amortization........................... 1,057,887 1,243,596 1,359,998
Gain on the sale of equipment........................... -- -- (15,150)
Common stock issued for technology milestone............ -- -- 250,000
Cashless exercise of warrants related to lease
agreements............................................ -- -- 38,330
Changes in assets and liabilities:
Accounts receivable................................... 451,934 53,333 (87,431)
Prepaid expenses and other current assets............. 144,007 (88,774) (107,672)
Other assets.......................................... (6,495) 106,056 (105,049)
Accounts payable and accrued expenses................. (458,577) 265,937 1,568,650
Deferred revenue...................................... (126,900) -- --
----------- ------------ ------------
Total adjustments................................... 61,856 1,580,148 2,901,676
----------- ------------ ------------
Net cash used for operating activities...................... (7,203,483) (10,244,858) (14,911,834)
----------- ------------ ------------
Cash flows for (from) investing activities:
Purchase of equipment..................................... (899,810) (1,795,285) (756,558)
Proceeds from the sale of equipment....................... -- -- 15,150
Leasehold improvements.................................... (94,753) (39,435) (85,350)
Purchase of equity interest............................... (1,000,000) -- --
Proceeds from sale of equity interest..................... 2,000,000 -- --
Purchases of short-term investments....................... (22,686,443) (8,692,514) (15,192,711)
Maturities of short-term investments...................... 15,976,820 6,709,623 9,304,710
Purchases of long-term investments........................ (8,569,107) (3,855,336) --
Maturities of long-term investments....................... -- 8,569,107 3,855,336
----------- ------------ ------------
Net cash provided by (used for) investing activities........ (15,273,293) 896,160 (2,859,423)
----------- ------------ ------------
</TABLE>
46
<PAGE>
CUBIST PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows for (from) financing activities:
Issuance of stock, net.................................... 5,942,697 12,770,227 22,345,909
Proceeds from notes receivable............................ -- 30,000 101,686
Repayments of long-term debt.............................. (189,943) (189,736) (84,923)
Proceeds from term loan................................... 927,686 941,255 1,139,578
Principal payments of capital lease obligations........... (695,417) (576,960) (623,721)
----------- ------------ ------------
Net cash provided by financing activities................... 5,985,023 12,974,786 22,878,529
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents........ (16,491,753) 3,626,088 5,107,272
Cash and cash equivalents at beginning of year.............. 19,329,353 2,837,600 6,463,688
----------- ------------ ------------
Cash and cash equivalents at end of year.................... $ 2,837,600 $ 6,463,688 $ 11,570,960
=========== ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.................... $ 237,119 $ 333,602 $ 331,341
Supplemental non-cash financing activities:
Cancellation of promissory note in connection
with resignation of officer (Note H).................... -- $ 37,776 --
Issuance of restricted common stock in exchange for a
promissory note......................................... $ 80,000 -- $ 506,250
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
CUBIST PHARMACEUTICALS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
$ ADDITIONAL PAID-IN CAPITAL
---------------------------------------- $ $
# OF SHARES $ ISSUANCE OF NOTES DEFERRED ACCUMULATED STOCKHOLDERS'
COMMON COMMON SHARES RECEIVABLE COMPENSATION DEFICIT EQUITY
----------- -------- ----------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996... 9,544,373 $ 9,544 $36,253,818 $(154,459) $ (79,751) $(15,730,542) $20,298,610
Exercise of stock options...... 57,981 58 119,320 119,378
Repurchase of common stock..... (1,390) (1) (519) (520)
Issuance of common stock, net
of offering costs............ 979,591 980 5,902,859 (80,000) 5,823,839
Amortization of deferred
compensation................. 20,000 43,924 63,924
Forgiveness of promissory
notes........................ 22,774 22,774
Net loss....................... (7,265,339) (7,265,339)
---------- ------- ----------- --------- --------- ------------ -----------
Balance at December 31, 1997... 10,580,555 10,581 42,275,478 (191,685) (35,827) (22,995,881) 19,062,666
---------- ------- ----------- --------- --------- ------------ -----------
Exercise of stock options...... 2,576 3 4,140 4,143
Shares issued in connection
with employee stock purchase
plan......................... 6,341 6 20,553 20,559
Repurchase of common stock..... (2,064) (2) (786) (788)
Issuance of common stock, net
of offering costs............ 6,065,560 6,065 12,774,811 12,780,876
Amortization of deferred
compensation................. 2,255 22,223 (11,158) 13,320
Repayment of promissory
notes........................ 30,000 30,000
Cancellation of promissory note
in connection with
resignation of officer....... (10,000) (10) (37,766) 37,776 --
Net loss....................... (11,825,006) (11,825,006)
---------- ------- ----------- --------- --------- ------------ -----------
Balance at December 31, 1998... 16,642,968 16,643 55,038,685 (101,686) (46,985) (34,820,887) 20,085,770
---------- ------- ----------- --------- --------- ------------ -----------
Exercise of stock options and
warrants..................... 432,626 433 810,983 811,416
Shares issued in connection
with employee stock purchase
plan and 401(k) plan......... 40,035 40 144,644 144,684
Issuance of common stock, net
of offering costs............ 3,407,729 3,408 22,180,981 (506,250) 21,678,139
Issuance of warrants for
services..................... 77,107 (77,107) --
Deferred compensation related
to grant of stock options.... 707,797 (703,125) 4,672
Amortization of deferred
compensation................. 140,538 140,538
Repayment of promissory
notes........................ 101,686 101,686
Net loss....................... (17,813,510) (17,813,510)
---------- ------- ----------- --------- --------- ------------ -----------
Balance at December 31, 1999... 20,523,358 $20,524 $78,960,197 $(506,250) $(686,679) $(52,634,397) $25,153,395
========== ======= =========== ========= ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Cubist Pharmaceuticals, Inc. is a specialty pharmaceutical company founded
in May 1992 and is focused on the research, development and commercialization of
novel antimicrobial drugs to combat serious and life-threatening bacterial and
fungal infections, including those caused by bacteria and fungi resistant to
commercially available drugs. Cubist has established multiple technology
licenses and collaborations and has established a network of advisors and
collaborators. Cubist is located in Cambridge, Massachusetts and operates in one
business segment.
Cubist is subject to risks common to companies in the industry including,
but not limited to, uncertainty of product development and commercialization,
lack of marketing and sales history, dependence on key personnel, market
acceptance of products, product liability, protection of proprietary technology,
ability to raise additional financing, and compliance with FDA and other
governmental regulations.
Cubist has a limited history of operations and has experienced significant
net losses since inception. At December 31, 1999, Cubist has an accumulated
deficit of $52.6 million. Cubist expects to incur significant additional net
losses over the next several years and expects cumulative losses to increase due
to expanded research and development efforts, preclinical testing and clinical
trials and the development of manufacturing, marketing and sales capabilities.
As a result, Cubist's business plan indicates that additional financing will be
required to support its planned expenditures. Cubist believes that the funds
currently available and future revenues due under its collaborative agreements
(Note E) will be sufficient to fund operations through at least the next twelve
months.
B. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements are stated on an accrual basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
49
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. ACCOUNTING POLICIES (CONTINUED)
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term interest-bearing instruments with
original maturities of three months or less. These investments are carried at
cost which approximates market value.
Cubist invests its cash and cash equivalents primarily in deposits, U.S.
Government treasuries and money market funds with financial institutions. Cubist
has not recorded any losses to date on its invested cash and cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments, with an original maturity of more than three months
and less than one year when purchased, consisted of certificates of deposit and
investment-grade commercial paper at December 31, 1998 and 1999. Short-term
investments, all of which are held to maturity, are stated at amortized cost
plus accrued interest, which approximates market value.
LONG-TERM INVESTMENTS
Long-term investments, with a maturity of more than twelve months when
purchased, consisted of investment-grade corporate debt at December 31, 1998.
Long-term investments, all of which are held to maturity, are stated at
amortized cost plus accrued interest, which approximates market value. Cubist
does not hold any long-term investments at December 31, 1999.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets,
generally three years for computer equipment and five years for laboratory
equipment and furniture and fixtures. Leasehold improvements are stated at cost
and
50
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. ACCOUNTING POLICIES (CONTINUED)
are amortized over the lesser of the life of the lease or their estimated useful
lives. Maintenance and repairs are charged to expense as incurred, while major
betterments are capitalized. When assets are retired or otherwise disposed of,
the assets and related allowances for depreciation and amortization are
eliminated from the accounts and any resulting gain or loss is reflected in
income.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Cubist has entered into various collaborative agreements with pharmaceutical
and biotechnology companies. Revenue derived from such collaborative agreements
is recognized in accordance with the terms of the contracts. Certain agreements
also provide for payments to Cubist upon the achievement of certain milestones
as well as royalties on the net sales of products developed resulting from the
collaboration, as defined in the respective agreements. Any revenue related to
milestones and royalties is recognized as earned.
Revenue from Small Business Innovation Research ("SBIR") government grants
to conduct research and development is recognized as eligible costs are incurred
up to the funding limit. Eligible grant-related costs which have been incurred
in advance of cash receipts are recorded as receivables.
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred.
INCOME TAXES
Cubist accounts for income taxes under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted rates in effect for the year in which those temporary differences
are expected to be recovered or settle. A deferred tax asset is established for
the expected future benefit of net operating loss and credit carryforwards. A
valuation
51
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. ACCOUNTING POLICIES (CONTINUED)
reserve against net deferred tax assets is required if, based upon available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of Cubist's financial instruments, which include cash
equivalents, investments, accounts receivable, accounts payable, accrued
expenses, capital lease obligations and long-term debt, approximate their fair
values.
NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. Diluted net loss per share does not differ
from basic net loss per share since potential common shares from stock options
and warrants are antidilutive for all periods presented and are therefore
excluded from the calculation. During the years ended December 31, 1997, 1998
and 1999, options to purchase 802,468, 1,519,094, and 1,978,533 shares of common
stock, respectively, and warrants for 86,619, 3,119,402, and 2,775,868 shares of
common stock, respectively, were not included in the computation of diluted net
loss per share since their inclusion would be antidilutive.
COMPREHENSIVE INCOME
Comprehensive loss is equal to net loss for the years ended December 31,
1997, 1998 and 1999.
DERIVATIVE INSTRUMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities", which was amended by SFAS No. 137 and is effective for
fiscal years beginning after June 15, 2000. The statement establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
52
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. ACCOUNTING POLICIES (CONTINUED)
met. Adoption of this standard is not expected to have a material impact on the
financial position or results of operations of Cubist.
NEW ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101") which is effective no later than the quarter ending March 31, 2000.
SAB 101 clarifies the Securities and Exchange Commission's views related to
revenue recognition and disclosure. Cubist will adopt SAB 101 in the first
quarter of 2000 and is presently determining the effect it will have on Cubist's
financial statements, although management does not believe the effect will be
material.
C. PROPERTY AND EQUIPMENT
At December 31, property and equipment consisted of:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Leasehold improvements...................................... $2,623,924 $2,709,274
Laboratory equipment........................................ 4,047,291 4,591,383
Furniture and fixtures...................................... 319,245 342,451
Computer equipment.......................................... 737,361 794,722
---------- ----------
7,727,821 8,437,830
---------- ----------
Less accumulated depreciation and amortization.............. (3,908,054) (4,990,943)
---------- ----------
Property and equipment, net................................. $3,819,767 $3,446,887
========== ==========
</TABLE>
Depreciation and amortization expense was $971,189, $1,195,713, and
$1,214,788 in 1997, 1998 and 1999, respectively.
53
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
D. ACCRUED EXPENSES
At December 31, accrued expenses consisted of:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Payroll and benefits........................................ $337,475 $ 342,792
Professional services....................................... 77,720 127,655
Annual report............................................... 50,000 100,008
Drug development............................................ 86,820 525,128
Miscellaneous............................................... 20,547 207,429
-------- ----------
Total accrued expenses...................................... $572,562 $1,303,012
======== ==========
</TABLE>
E. COLLABORATIVE RESEARCH AGREEMENTS
On December 15, 1995, Cubist entered into a collaborative research agreement
with Pfizer Inc. Under the terms of the agreement, Pfizer paid Cubist a
technology licensing fee upon execution and research support payments. In
addition, Pfizer reimbursed Cubist for expenses related to the screening of
Pfizer compounds against Cubist's targets and made certain milestone payments.
These reimbursement payments were recognized as revenue as the work was
completed. Cubist recorded sponsored research revenues of $150,000 in 1997, in
accordance with the agreement. On June 20, 1997, Cubist's collaborative
agreement with Pfizer expired pursuant to its own terms. Prior to such
expiration, Cubist had received all of the research support payments and
technology licensing fees that Cubist was entitled to receive under that
collaborative agreement.
In June 1996, Cubist entered into a collaborative research agreement with
Bristol-Myers Squibb Company ("Bristol-Myers Squibb"). Under the terms of the
agreement, Bristol-Myers Squibb purchased from Cubist $4,000,000 of Cubist's
preferred stock upon execution of the agreement, and has agreed to make payments
to Cubist upon the achievement of certain milestones. In addition, Bristol-Myers
Squibb reimbursed Cubist a fixed amount for research and development expenses
relating to the production of certain targets and also for expenses relating to
the screening of Bristol-Myers Squibb compounds against Cubist's targets over
three years. These reimbursements were paid at the beginning of each calendar
54
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
E. COLLABORATIVE RESEARCH AGREEMENTS (CONTINUED)
quarter in accordance with the agreement. Cubist recorded sponsored research
revenues of $500,000 in milestone payments in 1997 and $1,000,000, $1,000,000
and $500,000 in 1997, 1998 and 1999, respectively, for certain research and
development revenues in accordance with the agreement. Bristol-Myers Squibb's
exclusive research period ended in January 2000. Following January 7, 2000,
Bristol-Myers Squibb's rights to continue screening and research and development
with respect to Cubist's targets under the collaboration agreement continue on a
non-exclusive basis.
In June 1996, Cubist entered into a collaborative research agreement with
Merck & Co., Inc. ("Merck"). Under the terms of the agreement, Merck paid Cubist
a technology licensing fee upon execution and will pay certain milestone
payments if earned. In addition, Merck has reimbursed Cubist for research and
development expenses relating to the production of certain targets; for expenses
relating to the screening of Merck compounds against Cubist's targets; and for
expenses relating to compound optimization. These payments are recognized as
revenue as the work is completed. Cubist recorded sponsored research revenues of
$875,233, $106,667 and $2,500,000 in 1997, 1998 and 1999, respectively, for
certain research and development revenues and milestone payments, in accordance
with the agreement.
In May 1997, Cubist acquired 333,333 shares of Series B Convertible
Preferred Stock of Novalon Pharmaceutical Corporation ("Novalon"), together with
an option to purchase all of the capital stock of Novalon. The aggregate
purchase price for such shares and such option was $1.0 million. Cubist
allocated all of the $1.0 million aggregate purchase price to the option based
on management's estimates of the relative fair values of the option and the
shares of Series B Convertible Preferred Stock acquired. The value of the option
was amortized over the option period resulting in an $833,333 research and
development expense in 1997. On September 29, 1997, Cubist agreed to terminate
its option to acquire Novalon and sold its existing equity position back to
Novalon for $2.0 million resulting in a gain of $1,833,333 included in other
income. Cubist will pay Novalon a percent of revenues received by Cubist that
relates to the use of the technology.
On February 3, 1999, Cubist entered into a research and license agreement
with Novartis Pharma AG to use Cubist's proprietary VITA functional genomics
technology to validate and develop assays for antiinfective targets and to
identify new compounds for development as antiinfective agents. In exchange
55
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
E. COLLABORATIVE RESEARCH AGREEMENTS (CONTINUED)
for the license, Novartis will fund a research program for a period of three
years unless terminated earlier by Novartis. Cubist recorded $2,041,875 of
sponsored research revenues in 1999 related to this agreement. Further, if
certain scientific and development milestones are achieved, Novartis will make
milestone payments. In addition, Novartis will be required to pay royalties to
Cubist on worldwide sales of any drug developed and commercialized from any
products derived from this collaboration. Upon the signing of the research and
license agreement, Novartis purchased, and Cubist issued to Novartis, 797,448
shares of Common Stock for a total purchase price of $4.0 million in cash. The
proceeds from the sale of these shares will be primarily used to fund the
clinical development of daptomycin and development of its VITA functional
genomics technology.
F. LICENSE AGREEMENT
On November 7, 1997, Cubist entered into a license agreement with Eli Lilly
and Company ("Eli Lilly") pursuant to which Cubist acquired exclusive worldwide
rights to develop, manufacture and market daptomycin. In exchange for such
license, Cubist has paid an upfront license fee in cash and, if certain drug
development milestones are achieved, has agreed to pay milestone payments by
issuing shares of common stock to Eli Lilly. In addition, Cubist will be
required to pay royalties to Eli Lilly on worldwide sales of daptomycin. On
February 19, 1999 Cubist issued to Eli Lilly 56,948 shares of Cubist common
stock as a milestone payment pursuant to, and in accordance with, the terms of
the agreement. The value of the common stock was $250,000 and was recorded as
research and development expense.
G. FINANCINGS
On October 21, 1999, Cubist completed a private placement financing with
investors and raised approximately $18.8 million (less financing costs of
$1,328,892) by issuing 2,503,333 shares of common stock at $7.50 per share.
Cubist has filed a registration statement to register the resale of the
2,503,333 shares of common stock issued in this financing. The proceeds of this
private offering are being used primarily to fund its clinical trials of
daptomycin and the development of its proprietary genomic target validation and
assay development VITA functional genomics technology.
56
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
G. FINANCINGS (CONTINUED)
On September 23, 1998, Cubist completed a private placement financing with
investors and raised approximately $13.6 million (less financing costs of
approximately $901,000) by issuing 6,065,560 shares of common stock at $2.25 per
share, along with 3,032,783 warrants exercisable for common stock at $2.25 per
share. The warrants are exercisable at any time until September 23, 2003. The
value of the warrants and common stock in excess of par value have been
reflected in additional paid-in-capital. Cubist has filed a registration
statement to register 9,098,343 shares of common stock related to this
financing. The proceeds of this private offering were used primarily to fund its
clinical trials of daptomycin and the development of its proprietary genomic
target validation and assay development VITA functional genomics technology.
On July 18, 1997, Cubist completed a private equity financing in which
Cubist raised $6.0 million before offering expenses of $96,161 by issuing
979,591 common shares at $6.125 per share. These shares were subsequently
registered with the Securities and Exchange Commission.
H. STOCKHOLDERS' EQUITY
WARRANTS
Total warrants outstanding at December 31, 1999 were 2,775,868 (2,706,115
warrants relate to the September 23, 1998 financing described in footnote G).
In February 1999, Cubist issued to Bridge Technology Group a warrant
exercisable for 25,000 shares common stock at $4.31 per share. The value of the
warrants using the Black-Scholes option-pricing model is $77,107. The value is
being amortized to general and administrative expense over a one-year period,
and the warrants are due to expire February 2004.
NOTES RECEIVABLE FROM RELATED PARTIES
Cubist has accepted a promissory note from the Chief Executive Officer in
consideration for the preferred stock issued to him. In 1997, the term of this
note was extended to fall due in equal quarterly installments of $10,000
commencing on March 31, 1998. On October 14, 1999 the principal amount of this
note was paid in full.
57
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
H. STOCKHOLDERS' EQUITY (CONTINUED)
Cubist has accepted a promissory note from a Senior Vice President in
consideration for 50,000 shares of restricted common stock issued to him. The
aggregate principal amount of this note at December 31, 1999 is $506,250 and is
reflected in stockholders' equity as a reduction to paid-in-capital. This note
has an annual interest rate of 4% and falls due on September 25, 2002. The note
will be forgiven in three equal annual installments, contingent upon the Senior
Vice President's continued employment, until September 2002.
I. STOCK OPTIONS
Cubist has a stock option plan under which options to purchase 3,000,000
shares of its common stock may be granted to employees, directors, officers or
consultants. The options are generally granted at fair market value on the date
of the grant as determined by the Board of Directors, vest ratably over a
four-year period and expire ten years from the date of grant. At December 31,
1999 there were 342,340 shares available for future grant.
During 1994 and 1995, Cubist allowed employees and consultants to exercise
their full grants to take advantage of certain favorable tax benefits. Cubist
reserved the right to repurchase any unearned shares at the original purchase
price if the employee or consultant does not fulfill the vesting requirement.
1,390 and 2,064 shares of previously exercised options were repurchased in 1997
and 1998, respectively, because vesting schedules were not fulfilled. The
remaining shares are fully vested at December 31, 1999.
Cubist adopted the disclosure provisions of SFAS 123, Accounting for Stock
Based Compensation, in 1996 and has applied APB Opinion 25 and related
Interpretations in accounting for its plans. Had compensation costs for Cubist's
stock-based compensation plan been determined based on the fair value at the
grant dates as calculated in accordance with SFAS 123, Cubist's net loss and
loss per share for the years
58
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
I. STOCK OPTIONS (CONTINUED)
ended December 31, 1997, 1998 and 1999 would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------------- -------------------------------- --------------------------------
BASIC AND DILUTED BASIC AND DILUTED BASIC AND DILUTED
NET LOSS LOSS PER SHARE NET LOSS LOSS PER SHARE NET LOSS LOSS PER SHARE
----------- ----------------- ------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
As Reported.......... $(7,265,339) $(0.73) $(11,825,006) $(0.97) $(17,813,510) $(0.99)
Pro forma............ $(7,859,006) $(0.79) $(13,019,532) $(1.07) $(20,206,710) $(1.12)
</TABLE>
The fair value of each stock option was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected life of four (4) years, expected volatility of 87%, a
dividend yield of 0% and a risk-free interest rate of 6.36% in 1997; and an
expected life of four (4) years, expected volatility of 97%, a dividend yield of
0% and a risk-free interest rate of 4.7% in 1998; an expected life of seven
(7) years, expected volatility of 74%, a dividend yield of 0% and a risk-free
interest rate of 5.3% in 1999. The effects of applying SFAS 123 in this pro
forma disclosure are not indicative of future amounts. Additional awards in
future years are anticipated.
59
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
I. STOCK OPTIONS (CONTINUED)
A summary of the status of Cubist's stock option plan as of December 31,
1997, 1998 and 1999, and changes during each of the years then ended, is
presented below:
<TABLE>
<CAPTION>
1997 1998 1999
-------------------- --------------------- ---------------------
WAEP* WAEP* WAEP*
NUMBER PER SHARE NUMBER PER SHARE NUMBER PER SHARE
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1...................... 500,760 $1.93 802,468 $4.69 1,519,094 $3.44
Granted................................... 438,614 7.06 999,845 3.58 874,582 5.73
Exercised................................. (56,591) 2.06 (2,576) 1.61 (140,420) 2.94
Canceled.................................. (80,315) 2.29 (280,643) 7.17 (274,723) 3.67
------- ----- --------- ----- --------- -----
Balance at December 31.................... 802,468 $4.69 1,519,094 $3.44 1,978,533 $4.45
======= ===== ========= ===== ========= =====
Options exercisable at December 31........ 191,911 $2.73 366,039 $3.07 642,698 $3.57
Weighted average grant-date fair value of
options granted during the year:
Exercise price equals grant date stock
fair value............................ $5.41 $2.42 $3.72
Exercise price less than grant date
stock fair value...................... -- -- $7.94
</TABLE>
- ------------------------
* Weighted-average exercise price
60
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
I. STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$.007--$1.96............... 248,355 5.5 years $ 1.60 224,429 $1.56
$2.25--$5.00............... 1,054,337 9.0 years 3.24 197,618 3.06
$5.25--$7.00............... 419,659 7.9 years 5.69 201,911 5.73
$8.00- $11.625............. 256,182 9.6 years 10.20 18,740 9.74
--------- --------- ------ ------- -----
1,978,533 8.4 years $ 4.45 642,698 $3.57
========= ========= ====== ======= =====
</TABLE>
J. LEASE COMMITMENTS
Cubist leases its facilities under operating lease agreements which extend
through 2003. Certain of these leases contain renewal options for an additional
five-year period and provisions that adjust the base payment based upon changes
in the consumer price index and require Cubist to pay operating costs, including
property taxes, insurance and maintenance. Cubist provided a security deposit of
$100,000 upon execution of the lease. The security deposit bears interest in a
segregated account, and was partially refunded ($79,000 plus interest) on the
fifth anniversary, and is fully refundable plus interest within thirty days
after the expiration of the lease, provided no event of default has occurred. In
1995, Cubist entered into an agreement with the landlord under which the
landlord provided financing of $345,500 to Cubist for expansion of the facility,
which is payable in equal monthly installments of $7,685 over five years with an
annual interest rate of 12% through February 2000. No additional security
deposit was required. At December 31, 1999, the outstanding principal balance
was $15,143.
Cubist leases certain equipment under long-term capital leases. The cost of
this equipment included in fixed assets was $4,588,978, with associated
accumulated depreciation of $3,282,471, at December 31, 1999.
61
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
J. LEASE COMMITMENTS (CONTINUED)
Cubist intends to purchase all of the leased equipment at a price to be
negotiated at lease end. Future lease payments for non-cancelable leases for the
respective years ended December 31 are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES CAPITAL LEASES
---------------- --------------
<S> <C> <C>
2000...................................................... $ 552,912 $ 685,846
2001...................................................... 559,123 564,210
2002...................................................... 559,123 330,090
2003...................................................... 498,545 --
2004 and thereafter....................................... -- --
---------- ----------
Total minimum lease payments................................ $2,169,703 $1,580,146
========== ----------
Less amount representing interest payments.................. (286,252)
----------
Present value of minimum lease payments..................... 1,293,894
Less current portion........................................ (535,073)
----------
Long-term obligation........................................ $ 758,821
==========
</TABLE>
Lease payments under operating leases were $246,498, $312,228 and $401,968
in 1997, 1998 and 1999, respectively.
K. TERM LOAN
During March 1999, Cubist entered into a term loan agreement with a bank
under which Cubist is able to borrow up to $1,500,000 to finance fixed asset
purchases. Advances under this facility are to be repaid over a 36-month period,
commencing on March 31, 2000. Interest on the borrowings is at the bank's LIBOR
rate (8.42% at December 31, 1999). Borrowings under the facility are
collateralized by all capital equipment purchased with the funds under this term
loan. At December 31, 1999, borrowings outstanding totaled $1,139,578.
62
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
K. TERM LOAN (CONTINUED)
At December 31, 1999, payments of principal and interest on existing debt
were due as follows:
<TABLE>
<S> <C>
Fiscal year ending December 31,
2000........................................................ $ 571,699
2001........................................................ 571,699
2002........................................................ 571,699
----------
Total payments.............................................. 1,715,097
Less amounts representing interest.......................... (575,519)
----------
Total debt.................................................. $1,139,578
Less current portion........................................ (379,796)
----------
$ 759,782
==========
</TABLE>
L. EMPLOYEE BENEFITS
Cubist maintains a 401(k) savings plan in which substantially all of its
permanent employees are eligible to participate. Participants may contribute up
to 15% of their annual compensation to the plan, subject to certain limitations.
Prior to January 1, 1998, Cubist contributed a matching amount of up to 1.5% of
a participant's total compensation or $500 annually, whichever is less.
Effective January 1, 1998, participants were granted a matching option in cash
or Cubist common stock. Cubist will match in common stock up to 4.5% of a
participant's total compensation or 75% of a participant's total contribution
annually, whichever is less. Matches distributed in common stock have immediate
vesting. Cubist contributed $20,165, $6,160 and $5,853 during 1997, 1998 and
1999, respectively. Additionally, in 1999, Cubist issued 28,420 shares of common
stock pursuant to this plan. No shares were issued prior to 1999.
Cubist instituted an employee stock purchase plan in 1998, in which
substantially all of its permanent employees are eligible to participate.
Participants may contribute up to 15% of their annual compensation to the plan,
subject to certain limitations. The plan allows participants to purchase Cubist
common stock, after a pre-determined six-month period, through payroll
deductions at a price 15% less than the lower of
63
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
L. EMPLOYEE BENEFITS (CONTINUED)
the closing price for the beginning or ending date of the purchase period. The
plan allows for the issuance of 250,000 shares of common stock to eligible
employees. During 1998 and 1999, Cubist issued 6,341 and 11,615 shares of common
stock, respectively, pursuant to this plan.
M. INCOME TAXES
Based on Cubist's current financial status, realization of Cubist's deferred
tax assets does not meet the "more likely than not" criteria under SFAS No. 109
and, accordingly, a valuation allowance for the entire deferred tax asset amount
has been recorded. The components of the net deferred tax asset and the related
valuation allowance are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net operating loss carryforwards.................... $ 5,780,000 $ 10,715,000 $ 17,681,000
Research and development credits.................... 2,690,000 2,350,000 2,010,000
Research and experimentation credits................ 1,575,000 1,938,000 2,786,000
Other, net.......................................... 377,000 609,000 660,000
------------ ------------ ------------
Total deferred tax assets........................... $ 10,422,000 $ 15,612,000 $ 23,137,000
Valuation allowance................................. $(10,422,000) $(15,612,000) $(23,137,000)
------------ ------------ ------------
Net deferred tax assets............................. $ -- $ -- $ --
============ ============ ============
</TABLE>
Cubist's federal statutory and effective tax rates were 34% and 0%,
respectively, for 1997, 1998 and 1999. The effective tax rate was 0% due to a
net operating loss and the non-recognition of any deferred tax assets.
At December 31, 1999, Cubist has federal net operating loss carryforwards of
approximately $45.4 million, which begins to expire in 2007, and a state net
operating loss carryforwards of $37.5 million, which begins to expire in 2000.
Cubist also has federal and state credit carryforwards of $1,765,000 and
$1,546,000, respectively, begin to expire in 2008.
64
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
M. INCOME TAXES (CONTINUED)
Ownership changes resulting from the issuance of capital stock may limit the
amount of net operating loss and tax credit carryforwards that can be utilized
annually to offset future taxable income. The amount of the annual limitation is
determined based on Cubist's value immediately prior to the ownership change.
Subsequent significant changes in ownership could further affect the limitation
in future years.
N. SUBSEQUENT EVENTS
In January 1999, Cubist entered into a memorandum of understanding with DSM
Fine Chemicals B.V. pursuant to which DSM has agreed to manufacture and supply
to Cubist bulk daptomycin drug substance for commercial purposes. Under the
terms of the memorandum of understanding, DSM is required to prepare its
manufacturing facility in Italy to manufacture bulk daptomycin drug substance in
accordance with Good Manufacturing Practices standards, and Cubist will make a
series of scheduled payments to DSM over a five-year period beginning in 2000 in
order to reimburse DSM for up to $5.9 million of the costs to be incurred by DSM
in connection with the preparation, testing and validation of its manufacturing
facility. In addition, Cubist has agreed to make milestone payments to DSM if
specific phases of the preparation of its manufacturing facility are completed
within specified periods of time. The maximum amount of milestone payments that
Cubist may be required to make to DSM is $1.6 million. Upon completion of the
preparation of DSM's manufacturing facility and a determination by the FDA that
the manufacturing facility complies with Good Manufacturing Practices standards,
Cubist will purchase minimum annual quantities of bulk daptomycin drug substance
from DSM over a five-year period beginning in 2002.
On January 29, 2000, Cubist completed a private placement financing with
investors and raised approximately $55.0 million (less estimated financing costs
of $3,039,000) by issuing 2,200,000 shares of common stock at $25.00 per share.
Cubist filed a registration statement to register the resale of the 2,200,000
shares of common stock issued in this financing. Cubist plans to use the
proceeds of the private placement to fund its clinical trials of daptomycin, its
lipopeptide drug discovery program and the development of its proprietary
genomic target validation and assay development VITA functional genomics
technology.
65
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
66
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers and their ages as of March 10, 2000 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Scott M. Rocklage, Ph.D. .............. 45 Chairman of Board of Directors, Chief Executive
Officer and President
Francis P. Tally, M.D. ................ 59 Executive Vice President, Scientific Affairs
Alan D. Watson, Ph.D., M.B.A. ......... 47 Senior Vice President, Corporate Development
Thomas A. Shea, M.B.A. ................ 40 Vice President, Finance & Administration, Chief
Financial Officer and Treasurer
Michael F. DeBruin, M.D. .............. 45 Vice President, Clinical Research
Dennis D. Keith, Ph.D. ................ 56 Vice President, Drug Discovery
Frederick B. Oleson, Jr., D.Sc. ....... 50 Vice President, Drug Development
George H. Shimer, Jr., Ph.D. .......... 47 Vice President, Biology
Thomas J. Slater....................... 44 Vice President, Commercial Development
John K. Clarke(2)...................... 46 Director
Paul R. Schimmel, Ph.D. ............... 59 Director
Barry Bloom, Ph.D.(1).................. 71 Director
David W. Martin, Jr., M.D. ............ 59 Director
Trudie Resch(1)........................ 39 Director
Walter Maupay(2)....................... 61 Director
John Zabriskie, Ph.D.(1)............... 60 Director
</TABLE>
- ------------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
67
<PAGE>
DR. ROCKLAGE was elected Chairman of the Board of Directors in March 2000.
Dr. Rocklage has served as our President and Chief Executive Officer and as a
member of the board of directors since July 1994. From 1990 to 1994,
Dr. Rocklage served as President and Chief Executive Officer of Nycomed
Salutar, Inc., a diagnostic imaging company. From 1992 to 1994, he also served
as President and Chief Executive Officer and Chairman of Nycomed
Interventional, Inc., a medical device company. From 1986 to 1990, he served in
various positions at Nycomed Salutar, Inc. and was responsible for designing and
implementing research and development programs that resulted in three drug
products in human clinical trials, including the approved drugs Omniscan and
Teslascan. Dr. Rocklage received his B.S. in Chemistry from the University of
California, Berkeley and his Ph.D. in Chemistry from the Massachusetts Institute
of Technology.
DR. TALLY has served as our Executive Vice President, Scientific Affairs
since January 1997. From March 1995 to January 1997, he served as our Vice
President of Research and Development. From 1986 to February 1995, Dr. Tally
served as Executive Director of Infectious Disease, Molecular Biology and
Natural Products Research at the Lederle Laboratories of American
Cyanamid/American Home Products, where he was responsible for worldwide clinical
studies for piperacillin/tazobactam which was registered for sales in Europe in
1992, approved by the FDA in 1993 and marketed as Zosyn. From 1975 to 1986, he
served as Senior Physician in Infectious Disease at the New England Medical
Center and Associate Professor of Medicine at Tufts Medical Center. Dr. Tally
received his A.B. in Biology from Providence College and his M.D. from George
Washington University School of Medicine.
DR. WATSON has served as our Senior Vice President, Corporate Development
since September 1999. From October 1997 to August 1999, he served as Senior Vice
President, Intellectual Property and Licensing at Nycomed Amersham plc., a
diagnostic imaging and life sciences company. From January 1995 to
September 1997, he served as Senior Vice President, Technology Development at
Nycomed ASA. From January 1994 to June 1995, he served as Senior Vice President,
Research and Development at Nycomed Salutar, Inc. where he also served as a
Board Director. Prior to 1994, Dr. Watson served in various senior positions at
Salutar, Inc. From 1983 to 1986 while at DuPont Pharmaceuticals, Dr. Watson
invented the stroke-imaging drug Neurolite. Dr. Watson received his B.Sc. from
the University of U.S.W., Sydney, Australia; his M.B.A. from Northeastern
University; and his Ph.D. in Bioinorganic Chemistry from the Australia National
University.
MR. SHEA has served as our Vice President, Finance and Administration and
Chief Financial Officer since December 1998. He has also served as our Treasurer
and Chief Accounting Officer since June 1996. From December 1997 to
December 1998 he served as our Senior Director of Finance and Administration,
and from 1993 to November 1997, as our Director of Finance and Administration.
From 1987 to 1993, he
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<PAGE>
served as Manager of Accounting/MIS and Budget and Financial Analyst at
ImmuLogic Pharmaceutical Corporation, a biotechnology company. Mr. Shea received
his B.S. in Accounting/Law from Babson College and his M.B.A. from Suffolk
University.
DR. DEBRUIN has served as our Vice President, Clinical Research since
September 1999. From March 1998 to May 1999, he served as Therapeutic Area
Head-Infectious Diseases at Wyeth-Ayerst Research and Genetics Institute. From
March 1993 to February 1998, he served as Director of Clinical Development at
Genetics Institute. From 1988 to 1993, Dr. DeBruin served in various positions
at Pfizer, Inc. Dr. DeBruin was on the faculty at the University of Connecticut
School of Medicine, and was also in private practice treating infectious
diseases from 1988 to 1991. Dr. DeBruin received his B.A. from Cornell
University and his M.D. from New York Medical College.
DR. KEITH has served as our Vice President, Drug Discovery since
October 1997. From 1971 to October 1997, Dr. Keith was with Hoffman-La
Roche Inc. where he served in various positions, including Director of
Antiinfective Chemistry, Senior Director of Medicinal Chemistry and Research
Director of Oncology. Dr. Keith received his B.S. in Chemistry from Bates
College and his Ph.D. in Organic Chemistry from Yale University.
DR. OLESON has served as our Vice President, Drug Development since
November 1997. Prior to joining us, Dr. Oleson was an independent consultant
from June 1997 to November 1997. From January 1997 to June 1997, Dr. Oleson
served as Director of Preclinical Research at AutoImmune, Inc., a biotechnology
company. From 1992 to January 1997, Dr. Oleson served as Director, Toxicology
and Preclinical Pharmacology at Biogen, Inc., a biotechnology company.
Dr. Oleson also held various positions at Bristol-Myers Squibb from 1983 to
1992. Dr. Oleson was a key contributor in the development of the Biogen drug
Avonex and a key consultant in the development of Angiomax for The Medicines
Company. Dr. Oleson received his B.S. in Biochemistry from Princeton University
and a Doctor of Science in Physiology/ Radiation Biology from Harvard University
School of Public Health.
DR. SHIMER has served as our Vice President, Biology since January 2000.
Prior to joining us, Dr. Shimer was Senior Director, Pathogen Genomics at Genome
Therapeutics Corp. from February 1995 through January 2000. Dr. Shimer received
his B.S. in Biochemistry from North Carolina State University and his Ph.D. in
Biochemistry from Colorado State University.
MR. SLATER has served as our Vice President, Commercial Development since
May 1999. From July 1998 to April 1999, he served as Senior Vice President of
Business Development for Newport Strategies, a consulting company. From
January 1996 to June 1998, he served as Vice President, Biomaterials Business
for Genzyme Corporation, a biotechnology company. From 1988 to January 1996,
Mr. Slater served in
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<PAGE>
various sales and marketing positions for Genzyme Corporation. Prior to 1988,
Mr. Slater served in marketing and sales positions for pharmaceutical companies
Hoffman LaRoche and Upjohn. Mr. Slater received his B.S. in Biology from Upsala
College.
MR. CLARKE is one of our founders and served as Chairman of the Board of
Directors from our incorporation to March 2000. Mr. Clarke has served as one of
our directors since our incorporation. From 1992 to 1994, Mr. Clarke served as
our acting President and Chief Executive Officer. Since 1982, he has been a
general partner of DSV Management in Princeton, New Jersey, the general partner
of DSV Partners IV. He is a founder and director of Alkermes, Inc. and a
director of Plastic Surgeons of America Inc. Mr. Clarke is the Managing General
Partner for Cardinal Health Partners, founded in 1997. Mr. Clarke received his
B.A. in Biology and Economics from Harvard College and his M.B.A. from The
Wharton School of the University of Pennsylvania.
DR. SCHIMMEL is one of our scientific founders and has served as one of our
directors since our incorporation. From 1967 to 1998, Dr. Schimmel served as a
Professor of Biochemistry and Biophysics at the Massachusetts Institute of
Technology and as the John D. and Catherine T. MacArthur Professor of
Biochemistry and Biophysics at the Massachusetts Institute of Technology from
1992 to 1997. He has been a Professor and member of the Skaggs Institute for
Chemical Biology of the Scripps Research Institute since 1997. Dr. Schimmel is
an expert in molecular biology, protein translation and aminoacyl-tRNA
synthetases. He is a member of the National Academy of Sciences and the American
Academy of Arts and Sciences. Dr. Schimmel was a founder and is a director of
Repligen Corporation and Alkermes, Inc., each a biotechnology company.
Dr. Schimmel received his A.B. in Pre-Medicine from Ohio Wesleyan University and
his Ph.D. in Biochemistry from the Massachusetts Institute of Technology.
DR. BLOOM has served as a one of our directors since September 1993.
Dr. Bloom has more than 40 years experience in the pharmaceutical industry. From
1952 to 1993, Dr. Bloom served in various positions at Pfizer Inc., including
Executive Vice President of Research & Development. He is a director of Vertex
Pharmaceuticals, Inc. and Neurogen Corp., biotechnology companies; Microbia, a
biotechnology company; Catalytica Pharmaceuticals, Inc., a chemical manufacturer
and supplier, and Incyte Pharmaceuticals, Inc., a genomics company. Dr. Bloom
received his S.B. in Chemistry and his Ph.D. in Organic Chemistry from the
Massachusetts Institute of Technology.
DR. MARTIN has served as one of our directors since October 1997. Since
July 1997, Dr. Martin has served as President, Chief Executive Officer and a
founder of Eos Biotechnology, Inc. Dr. Martin was a Professor of Medicine,
Professor of Biochemistry and an Investigator of the Howard Hughes Medical
Institute at the University of California San Francisco until 1983 when he
became the First Vice President and subsequently Senior Vice President of
Research and Development at Genentech, Inc., a position he
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held until 1990. He was Executive Vice President of DuPont Merck Pharmaceutical
Company from 1991 through 1993 and then returned to California in 1994 where he
was Senior Vice-President of Chiron Corp., a biotechnology company, and
President of Chiron Therapeutics. In May 1995, he assumed the position of
President and Chief Executive Officer of Lynx Therapeutics, Inc., a
biotechnology company, and served until November 1996. Dr. Martin is also a
Director of Varian Associates, Inc., a medical equipment supplier.
MS. RESCH has served as one of our directors since June 1999. Since
June 1998, Ms. Resch has served as Director at Sofinov Societe Financiere
d'Innovation Inc. From June 1998 to June 1999, she served as Manager at Sofinov.
From June 1997 to December 1997, Ms. Resch was a consultant, principally working
with Sofinov.
MR. MAUPAY has served as one of our directors since June 1999. Since 1988,
Mr. Maupay has served as President of Calgon Vestal Laboratories, a division of
Merck & Co., Inc. until January 1995, when it was sold to Bristol-Myers Squibb.
Since June 1995, Mr. Maupay has also served as Group Executive of Calgon Vestal
Laboratories after the sale to Bristol-Myers Squibb. From 1984 to 1988
Mr. Maupay served as Vice-President, Healthcare at Calgon Vestal Laboratories.
Mr. Maupay is a director of Life Medical Sciences, Inc., a medical device
company, Kensey Nash Corporation, a medical device company, Neshaminy Golf
Club, Inc. and Warwick Golf Farm. Mr. Maupay received his Bachelor of Science in
Pharmacy from Temple University and his M.B.A. from Lehigh University.
DR. ZABRISKIE has served as one of our directors since June 1999. Since
July 1997, Dr. Zabriskie has served as Chairman of the Board of NEN Life Science
Products, Inc., a laboratory supply company. From July 1997 to December 1999,
Dr. Zabriskie also served as President and Chief Executive Officer of NEN Life
Science Products, Inc. From November 1995 to January 1997, he was President and
Chief Executive Officer of Pharmacia & Upjohn. From 1994 to November 1995, he
served as President, Chief Executive Officer and Chairman of UpJohn Co.
THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
Our board of directors is divided into the following three classes, with the
members of the respective classes serving for staggered three-year terms.
- Class I directors, whose terms expire at the annual meeting of
stockholders to be held in 2000;
- Class II directors, whose terms expire at the annual meeting of
stockholders to be held in 2001; and
- Class III directors, whose terms expire at the annual meeting of
stockholders to be held in 2002.
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<PAGE>
Dr. John Zabriskie, Dr. David Martin and Ms. Trudie Resch are our Class I
directors, Mr. Walter Maupay and Dr. Barry Bloom are our Class II directors, and
Dr. Rocklage, Mr. Clarke and Dr. Schimmel are our Class III directors.
Mr. George Conrades resigned as a Class II director as of December 20, 1999 The
Board of Directors has not appointed a new member to the Board to fill the
vacancy created by his resignation. At each annual meeting of stockholders, our
stockholders will elect the successors to directors whose terms have expired to
serve from the time of election and qualification until the third annual meeting
following election. The classification of the board of directors may delay or
prevent a change in control or in the management of Cubist.
Our Board of Directors has an Audit Committee, which met one time during the
1999 fiscal year. The functions of the Audit Committee include:
- making recommendations to the Board of Directors with respect to the
engagement of the independent auditors;
- reviewing the audit plans developed by the independent auditors for the
annual audit of our books and records and the results of such audit;
- reviewing the annual financial statements;
- reviewing the professional services provided by the independent auditors
and the auditors' independence; and
- reviewing the adequacy of our system of internal controls and the
responses to management letters issued by the independent auditors.
The members of the Audit Committee during the 1999 fiscal year were Dr. Barry
Bloom, Dr. John Zabriskie, Ms. Trudie Resch and Mr. Terrance McGuire. Terrance
McGuire resigned his position as Director, effective February 5, 1999. Dr. John
Zabriskie and Ms. Trudie Resch became members of the Audit Committee as of
June 1, 1999.
The Board of Directors has a Compensation Committee, which met two time(s)
during the 1999 fiscal year. The Compensation Committee's principal functions
are to:
- review and approve salary plans and bonus awards, as well as other forms
of compensation,
- to administer our 1993 Amended and Restated Stock Option Plan, and
- to administer our 1997 Stock Purchase Plan.
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The members of the Compensation Committee during the 1999 fiscal year were
Mr. John K. Clarke, Mr. George Conrades and Mr. Walter Maupay. Mr. Walter Maupay
became a member of the compensation Committee as of June 1, 1999. Mr. George
Conrades resigned his position as a director, effective as of December 20, 1999.
The Board of Directors has not appointed a new member to the Compensation
Committee to fill the vacancy created by his resignation.
During the 1999 fiscal year, the Board of Directors held four meetings. Each
director attended more than seventy-five percent (75%) of the Board meetings,
and the meetings of Board committees on which he or she served, except
Mr. Conrades who attended fifty percent (50%) of the Board meetings.
COMPENSATION OF DIRECTORS
Dr. Rocklage is Chairman of the Board of Directors and one of our full-time
officers; he receives no additional compensation for serving on the Board of
Directors or its committees. No other director is a full-time officer. In 1999,
we paid $1,000 to Dr. Bloom, Dr. Martin and Mr. Conrades, each for each meeting
of the Board of Directors they attended. No other director received cash
compensation during the 1999 fiscal year for his or her service on the Board of
Directors or any committee thereof. In 2000, Dr. Bloom, Dr. Martin, Mr. Maupay
and Dr. Zabriskie will receive a fee of $1,000 for each Board meeting attended
and will be reimbursed for expenses incurred in connection with their
attendance. No other director will receive cash compensation during the 2000
fiscal year for his or her service on the Board of Directors or any committee
thereof.
Pursuant to our stock option plan, upon first joining the Board of
Directors, each director who is not one of our officers or employees is granted
automatically a stock option exercisable for 15,000 shares of common stock at
fair market value, and each time that he or she is serving as a director on the
business day immediately following an annual meeting of stockholders, such
director is automatically granted on such business day a stock option
exercisable for 2,000 shares of common stock at fair market value.
Pursuant to a consulting agreement, Dr. Schimmel received $48,000, for
consulting services during 1999.
COMPENSATION COMMITTEE INTERLOCKS
None of the members of our compensation committee was, at any time since our
formation, an officer or employee. None of our executive officers serve as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board of directors
or compensation committee.
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SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, as amended, our
directors, executive, and certain other officers, and any persons holding more
than ten percent of our common stock are required to report their ownership of
common stock and any changes in that ownership to the SEC. Specific due dates
for these reports have been established and we are required to report any
failure to file by these dates during 1999. To our knowledge, all of these
filing requirements were satisfied by its directors, officers and ten percent
holders. In making these statements, we have relied upon the written
representations of its directors, officers and its ten percent holders and
copies of the reports that they have filed with the SEC.
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ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below sets forth compensation information for the fiscal years
ended December 31, 1999, 1998, and 1997 with respect to our Chief Executive
Officer and other executive officers whose 1999 total annual compensation
exceeded $100,000.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
NAME AND ------------------------- STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($) AWARDS($) OPTIONS(#) COMPENSATION($)(2)
- ------------------ -------- ------------ -------- ---------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Scott M. Rocklage, Ph.D.(3)................ 1999 $284,100 $185,000 $ 85,000 $ 8,858
Chairman of the Board, Chief Executive 1998 $258,923 $63,500 $ -- 175,000 $ 8,076
Officer and President 1997 $225,000 $90,000 $ -- 35,000 $27,154
Francis P. Tally, M.D...................... 1999 $233,263 $34,040 $ 41,500 $16,067
Executive Vice President; 1998 $220,000 $40,000 $ -- 65,398 $ 9,258
Scientific Affairs 1997 $220,000 $11,000 $ -- -- $ 9,308
Thomas A. Shea, M.B.A...................... 1999 $134,221 $ -- $ 25,500 $ 5,763
Vice President Finance & Admin. 1998 $111,807 $ -- $ -- 44,500 $ 1,000
Chief Financial Officer, Treasurer 1997 $ 89,587 $ -- $ -- -- $ 1,050
Dennis D. Keith, Ph.D...................... 1999 $167,723 $15,000 $ 15,000 $ 7,901
Vice President; 1998 $160,000 $ -- $ -- 35,000 $ 1,000
Drug Discovery 1997 $ 27,692(4) $ -- $ -- 75,000 $ 110
Frederick B. Oleson, Jr., D.Sc............. 1999 $150,096 $28,400 $ 40,000 $ 7,002
Vice President; 1998 $140,000 $ -- $ -- 35,000 $ 500
Drug Development 1997 $ 17,231(5) $ -- $ -- 55,000 $ 83
</TABLE>
- ------------------------------
(1) Salary includes amounts deferred pursuant to our 401(k) Plan.
(2) All other compensation includes (i) the forgiveness of principal and accrued
interest owed by Dr. Rocklage in 1997 and 1996, (ii) long-term disability
insurance premiums paid by Cubist and (iii) Cubist's matching contributions
under our 401(k) Plan.
(3) Dr. Rocklage was appointed Chairman of the Board of Directors on March 3,
2000.
(4) Reflects compensation from October 20, 1997 to December 31, 1997.
Dr. Keith's employment commenced on October 20, 1997.
(5) Reflects compensation from November 6, 1997 to December 31, 1997.
Dr. Oleson's employment commenced on November 6, 1997.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding grants of stock options
under our 1993 Stock Option Plan to the named executive officers during the
fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF PERCENT
SECURITIES OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED TO EXERCISE GRANT DATE
GRANTED EMPLOYEES IN OR BASE EXPIRATION PRESENT
NAME (SHARES)(1) FISCAL 1999 PRICE DATE VALUE(2)
- ---- ----------- ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Scott M. Rocklage, Ph.D.................. 60,000 6.9% 3.813 01/01/09 $167,934
25,000 2.9% 4.375 01/01/09 69,973
Thomas A. Shea........................... 25,500 2.9% 3.813 01/01/09 71,316
Francis P. Tally, MD..................... 41,500 4.7% 3.813 01/01/09 116,154
Dennis D. Keith, Ph.D.................... 15,000 1.7% 3.813 01/01/09 41,984
Frederick B. Oleson, Jr., D.Sc........... 40,000 4.6% 3.813 01/01/09 111,868
</TABLE>
- ------------------------
(1) Each option is exercisable in 16 equal quarterly installments, and has a
maximum term of 10 years from the date of grant, subject to earlier
termination in the event of the optionee's cessation of service with Cubist.
The options are exercisable during the holder's lifetime only by the holder
and they are exercisable by the holder only while the holder is an employee
of Cubist and for certain limited periods of time thereafter in the event of
termination of employment.
(2) Based on the Black-Scholes pricing model suggested by the Securities and
Exchange Commission. The estimated values under that model are based on
arbitrary assumptions as to variables such as stock price volatility,
projected future dividend yield and interest rates, discounted for lack of
marketability and potential forfeiture due to vesting schedule. The
estimated values above use the following significant assumptions:
volatility--74%; dividend yield--0%; the average life of the options--
7.2 years; risk-free interest rate--yield to maturity of 10-year treasury
note at grant date--4.67%. The actual value, if any, an executive may
realize will depend on the excess of the stock price over the exercise price
on the date the option is exercised. There is no assurance that the value
realized by an executive will be at or near the value estimated using a
modified Black-Scholes model.
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<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the stock options
exercised during the fiscal year ended December 31, 1999, and the unexercised
stock options held at the end of such fiscal year by the named executive
officers.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE MONEY OPTIONS
DECEMBER 31, 1999 DECEMBER 31, 1999(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Scott M. Rocklage, Ph. D............... 14,285 $107,387 169,937 221,101 $2,760,153 $3,486,563
Thomas A. Shea......................... -- -- 41,355 52,460 683,915 821,777
Francis P. Tally, M.D.................. -- -- 29,356 77,787 447,931 1,217,655
Dennis D. Keith, Ph. D................. -- -- 49,062 75,938 650,169 1,089,676
Frederick B. Olseson, Jr., D. Sc....... -- -- 43,750 86,250 648,163 1,328,858
</TABLE>
- ------------------------------
(1) Based on the difference between the exercise price of each option and the
last reported sales price of our common stock on the NASDAQ-NMS on
December 31, 1999 of $19.25.
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<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENTS
Dr. Rocklage, our Chairman of the Board of Directors, President and Chief
Executive Officer, is employed pursuant to an employment agreement, dated
June 20, 1994. Under the terms of that agreement, Dr. Rocklage's annual base
salary was set at $175,000 subject to annual review and increase by the Board of
Directors, and he is entitled to a performance bonus upon our achievement of
certain milestones for each fiscal year that have been mutually agreed upon by
Dr. Rocklage and the Board of Directors prior to the commencement of that
particular fiscal year. Dr. Rocklage received a base salary in 1999 of $285,000
and a performance bonus of $115,000. We can terminate Dr. Rocklage's employment
at any time by giving written notice of termination and may be terminated by
Dr. Rocklage at any time upon thirty days' written notice of termination. Upon
any termination of Dr. Rocklage's employment by us without cause, Dr. Rocklage
is entitled to severance pay in an amount equal to six months of his then
current annual base salary.
None of our other executive officers has entered into an employment
agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of
common stock as of March 3, 2000 by:
- each person or entity we know who owns beneficially 5% or more of our
common stock;
- each of our directors and our executive officers; and
- all executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules and
regulations of the SEC. In computing the number of shares beneficially owned by
a person and the percentage ownership of that person, shares of common stock
subject to options held by that person that are currently exercisable or
exercisable within 60 days of March 3, 2000 are deemed outstanding. These
shares, however, are not deemed outstanding for the purposes of computing the
percentage ownership of any other person. Except as indicated below and pursuant
to applicable community property laws, each stockholder named in the table has
sole voting and investment power with respect to the shares set forth opposite
such stockholder's name. Shares included below under "Right to Acquire"
represent shares subject to outstanding stock options or common stock purchase
warrants. Unless otherwise indicated, the address for each of the following
stockholders is c/o Cubist Pharmaceuticals, Inc., 24 Emily Street, Cambridge,
Massachusetts 02139.
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Percentage of beneficial ownership is based on 23,359,054 shares outstanding
as of March 3, 2000.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED
---------------------------------- PERCENTAGE OF
OUTSTANDING RIGHT TO TOTAL SHARES BENEFICIALLY
NAME AND ADDRESS SHARES ACQUIRE NUMBER OWNED
- ---------------- ----------- -------- --------- -------------------
<S> <C> <C> <C> <C>
Sofinov Societe Financiere D'Innovation Inc................. 1,029,823 1,113,862 2,143,685 8.8%
1981 Avenue McGill College
7e etage
Montreal, Quebec H3A 3C7
ENTITIES AFFILIATED WITH
Hambrecht & Quist Capital Management Incorporated........... 1,287,171 333,334 1,620,505 6.8
50 Rowes Wharf
Boston, MA 02110
New York Life Insurance Company............................. 888,888 444,444 1,333,332 5.6
51 Madison Avenue
New York, NY 10010
Scott M. Rocklage, Ph.D..................................... 208,908 220,991 429,899 1.8
Francis P. Tally, M.D....................................... 102,857 44,296 147,153 *
Alan D. Watson, Ph.D., M.B.A................................ 52,000 15,937 67,937 *
Thomas A. Shea, M.B.A....................................... 7,142 38,424 45,566 *
Michael F. DeBruin, M.D..................................... -- 9,375 9,375 *
Dennis D. Keith, Ph.D....................................... 22,116 64,999 87,115 *
Frederick B. Oleson, Jr., D.Sc.............................. -- 60,312 60,312 *
George H. Shimer, Jr., Ph.D................................. -- 4,687 4,687 *
Thomas J. Slater............................................ -- 17,500 17,500 *
John K. Clarke.............................................. -- 9,174 9,174 *
Paul R. Schimmel, Ph.D...................................... 295,713 26,316 322,029 *
Barry Bloom, Ph.D........................................... 7,142 16,316 23,458 *
David W. Martin, Jr., M.D................................... -- 5,900 5,900 *
Trudie Resch................................................ -- 2,750 2,750 *
Walter Maupay............................................... 6,000 2,750 8,750 *
John Zabriskie, Ph.D........................................ 4,000 2,750 6,750 *
All directors and executive officers as a group (16
persons).................................................. 705,878 542,476 1,248,354 5.2
</TABLE>
- ------------------------------
* Indicates less than 1%
With respect to the foregoing table, you should note that:
- Sofinov Societe Financiere D'Innovation Inc. is a wholly-owned subsidiary
of Caisse De Depot et Placement du Quebec. Because of such relationship,
Caisse is the indirect beneficial owner of the
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<PAGE>
shares attributable to Sofinov and may be deemed to beneficially own all
of the shares owned by Sofinov. In addition, the shares Sofinov has the
right to acquire includes the shares Ms. Resch has the right to acquire.
Ms. Resch is a member of the Board of Directors and holds the position of
Director at Sofinov.
- The shares attributable to entities affiliated with Hambrecht & Quest
Capital Management Inc. includes shares and warrants held by H&Q
Healthcare Investors and shares and warrants held by H&Q Life Sciences
Investors. Hambrecht & Quist Capital Management Inc. is the Investment
Adviser of H&Q Healthcare Investors and H&Q Life Sciences Investors and
therefore has voting and investment power with respect to the shares owned
by H&Q Healthcare Investors and H&Q Life Sciences Investors. Hambrecht &
Quist Capital Management Inc. may be deemed to beneficially own all of the
shares owned by H&Q Healthcare Investors and H&Q Life Sciences Investors
although Hambrecht & Quist Capital Management Inc. disclaims beneficial
ownership.
- A portion of the shares attributable to Dr. Schimmel are held by the Paul
R. Schimmel Profit-Sharing Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 25, 1999, in consideration for the performance of services by
Alan Watson, Senior Vice President, Corporate Development, we issued to
Mr. Watson 50,000 restricted shares of common stock, at a purchase price of
$10.125 per share, the fair market value of the common stock as determined by
the Board of Directors. Mr. Watson purchased the shares by executing a
promissory note to Cubist in the amount of, $506,250 with a 4% annual interest
rate. This note is secured by the 50,000 shares of common stock. The principal
and interest on the promissory note will be forgiven in three equal installments
on September 25, 2000, September 25, 2001, and September 25, 2002.
We have adopted a policy, that all transactions between Cubist and its
officers, directors and affiliates must (i) be approved by a majority of those
members of the Board of Directors that are not parties, directly or indirectly
through affiliates, to such transactions and (ii) be on terms no less favorable
to Cubist than could be obtained from unrelated third parties.
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For a description of certain transactions and certain employment and other
arrangements between Cubist and certain of its directors and executive officers,
see "Compensation of Directors" and "Executive Employment Agreements."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF FORM 10-K
1. FINANCIAL STATEMENTS.
The following financial statements and supplementary data are included in
Part II Item 8 filed as part of this report:
- Report of Independent Accountants
- Balance Sheets as of December 31, 1999 and 1998
- Statements of Operations for the years ended December 31, 1999, 1998 and
1997
- Statements of Cash Flows for the years ended December 31, 1999, 1998 and
1997
- Statements of Stockholders' Equity for the years ended December 31, 1999,
1998 and 1997
- Notes to Financial Statements
2. FINANCIAL STATEMENT SCHEDULE.
None.
Schedules not listed above have been omitted because they are not
applicable, not required or the information required is shown in the financial
statements or the notes thereto.
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<PAGE>
3. LIST OF EXHIBITS
<TABLE>
<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3 to Cubist's
Quarterly Report on Form 10-Q filed on August 12, 1999)
(File no. 000-21379)
3.2 Amended and Restated By-Laws of the Registrant, as amended
to date. (Exhibit 3.4, Registration No. 333-6795)
4.1 Specimen certificate for shares of Common Stock
(incorporated by reference to Exhibit 3.4 to Cubist's
Registration Statement on Form S-1) (Registration No.
333-6795)
4.2 Rights Agreement dated as of July 21, 1999 between Cubist
and BankBoston, N.A. as Rights Agent (incorporated by
reference to Exhibit 99.1 to Cubist's Report on Form 8-K
filed on July 30, 1999) (File No. 000-21379)
4.3 First Amendment dated as of March 7, 2000 to the Rights
Agreement, dated as of July 21, 1999 between Cubist and
Fleet National Bank f/k/a BankBoston, N.A. as Rights Agent
(incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form 8-A/A filed on March 9, 2000)
(File No. 000-21379)
+10.1 Patent License Agreement between the Registrant and the
Massachusetts Institute of Technology, dated March 10, 1994.
(Exhibit 10.1, Registration No. 333-6795)
+10.2 License Agreement between the Registrant and the Board of
Trustees of Leland Stanford Junior University, dated
April 1, 1994. (Exhibit 10.2, Registration No. 333-6795)
10.3 Employment Agreement between the Registrant and Scott M.
Rocklage, dated June 20, 1994. (Exhibit 10.3, Registration
No. 333-6795)
10.4 Consulting Agreement between the Registrant and Paul R.
Schimmel, dated May 1, 1992. (Exhibit 10.4, Registration No.
333-6795)
10.5 Amended and Restated 1993 Stock Option Plan. (Exhibit 10.6,
Registration No.333-6795)
10.6 Collaborative Research and License Agreement between the
Registrant and Merck & Co., Inc., dated June 13, 1996.
(Exhibit 10.8, Registration No. 333-6795)
</TABLE>
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<TABLE>
<C> <S>
10.7 Collaborative Research and License Agreement between the
Registrant and Bristol-Myers Squibb Company and the
Registrant, dated June 25, 1996. (Exhibit 10.9, Registration
No. 333-6795)
10.8 Screening Agreement, dated November 28, 1995, between the
Registrant and Monsanto Company. (Exhibit 10.11,
Registration No. 333-6795)
10.9 Letter Agreement, dated January 18, 1996, between Pharm-Eco
Laboratories, Inc. and the Registrant. (Exhibit 10.12,
Registration No. 333-6795)
+10.10 Research Collaboration and License Agreement with ArQule,
Inc., dated October 22, 1997. (Exhibit 10.12, Annual Report
on Form 10-K, File No. 000-21379)
10.11 Lease Agreement between Registrant and Stimpson Family Trust
dated April 30, 1993, regarding 24 Emily Street, Cambridge,
MA., as amended by the First Amendment to Lease, dated
September 19, 1994. (Exhibit 10.13, Registration
No.333-6795)
10.12 Form of Employee Confidentiality and Nondisclosure
Agreement. (Exhibit 10.15, Registration No. 333-6795)
10.13 Master Lease Agreement between the Registrant and Comdisco,
Inc., dated as of August 30, 1993, as amended February 7,
1995, and as further amended on February 26, 1996.
(Exhibit 10.16, Registration No. 333-6795)
10.14 Series B Convertible Preferred Stock Purchase Warrant
between the Registrant and Comdisco, Inc., dated August 30,
1993. (Exhibit 10.17, Registration No. 333-6795)
10.15 Series C Convertible Preferred Stock Purchase Warrants
between the Registrant and Comdisco, Inc., dated
February 28, 1995 and February 26, 1996. (Exhibit 10.18,
Registration No. 333-6795)
10.16 Series C Convertible Preferred Stock Purchase Options issued
to Dr. Paul Schimmel and Dr. Julius Rebek in May 1995, as
amended by certain Letter Agreements, dated October 23,
1995, between the Registrant and each of Dr. Schimmel and
Dr. Rebek. (Exhibit 10.19, Registration No. 333-6795)
10.17 Amended and Restated Stockholders Rights Agreement by and
among the Registrant and the parties signatory thereto.
(Exhibit 10.20, Registration No. 333-6795)
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10.18 Secured Promissory Note, dated as of July 21, 1994, by Scott
M. Rocklage to the Registrant. (Exhibit 10.21, Annual Report
on Form 10-K, filed March 31, 1997, File No. 000-21379)
10.19 Amendment to Promissory Note, dated as of July 21, 1996, by
and between the Registrant and Scott M. Rocklage.
(Exhibit 10.22, Annual Report on Form 10-K, filed March 31,
1997, File No. 000-21379)
10.20 Amendment to Promissory Note, dated as of December 23, 1997,
by and between the Registrant and Scott M. Rocklage.
(Exhibit 10.22, Annual Report on Form 10-K, filed March 20,
1998, File No. 000-21379)
10.21 Promissory Note, dated as of October 18, 1995, by and
between the Registrant and Scott M. Rocklage.
(Exhibit 10.23, Annual Report on Form 10-K, filed March 20,
1998, File No. 000-21379)
+10.22 Compound Library Screening Agreement between the Registrant
and Genzyme Corporation, dated February 24, 1997.
(Exhibit 10.24, Amendment to Annual Report on Form 10-K/A,
filed October 22, 1998, File No. 000-21379)
+10.23 Library Sample Evaluation Agreement between the Registrant
and Pharmacopeia, Inc., dated as of September 11, 1996.
(Exhibit 10.25, Amendment to Annual Report on Form 10-K/A,
filed October 22, 1998, File No. 000-21379)
10.24 Stock Purchase Agreement, dated July 18, 1997, between
International Biotechnology Trust plc and the Company.
(Exhibit 10.27, Registration No. 333-33883)
10.25 Registration Rights Agreement, dated July 18, 1997, between
International Biotechnology Trust plc and the Company.
(Exhibit 10.28, Registration No. 333-33883)
10.26 Registration Rights Agreement, dated July 18, 1997, between
each of H&Q Healthcare Investors and H&Q Life Sciences
Investors and the Company. (Exhibit 10.29, Registration No.
333-33883)
10.27 Master Lease Agreement between the Registrant and
Transamerica Business Credit, dated as of February 14, 1997.
(Exhibit 10.33, Annual Report on Form 10-K, filed March 20,
1998, File No. 000-21379)
+10.28 License Agreement, dated November 7, 1997, between the
Company and Eli Lilly. (Exhibit 10.3, Amendment to Quarterly
Report on Form 10-Q/A, filed October 22, 1998, File No.
000-21379)
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+10.29 Amendment No. 1 to Collaborative Research and License
Agreement with Merck, dated as of October 30, 1997
(Exhibit 10.1, Quarterly Report on Form 10-Q, filed
August 12, 1998, File No. 000-21379)
+10.30 Amendment No. 2 to Collaborative Research and License
Agreement with Merck, dated as of April 30, 1998
(Exhibit 10.2, Quarterly Report on Form 10-Q, filed
August 12, 1998, File No. 000-21379)
10.31 First Amendment to Amended and Restated 1993 Stock Option
Plan (Exhibit 10.3, Quarterly Report on Form 10-Q, filed
August 12, 1998, File No. 000-21379)
10.32 1997 Employee Stock Purchase Plan. (Exhibit 10.4, Quarterly
Report on Form 10-Q, filed August 12, 1998, File No.
000-21379)
10.33 Securities Purchase Agreement, dated as of September 10,
1998 between the Company and each of the Purchasers listed
on Exhibit A thereto (Exhibit 10.1, Quarterly Report on
Form 10-Q, filed November 4, 1998, File No. 000-21379)
10.34 Registration Rights Agreement, dated as of September 10,
1998 between the Company and each person listed on
Exhibit A thereto (Exhibit 10.2, Quarterly Report on
Form 10-Q, filed November 4, 1998, File No. 000-21379)
10.35 Common Stock Purchase Warrants, dated September 23, 1998,
executed by the Company (Exhibit 10.3, Quarterly Report on
Form 10-Q, filed November 4, 1998, File No. 000-21379)
10.36 Collaborative Research and License Agreement between Cubist
and Novartis Pharma AG, dated as of February 3, 1999
(Exhibit 10.1, Quarterly Report on Form 10-Q, filed May 13,
1999, File No. 000-21379)
10.37 Stock Purchase Agreement between Cubist and Novartis Pharma
AG, dated as of February 3, 1999 (Exhibit 10.2, Quarterly
Report on Form 10-Q, filed May 13, 1999, File No. 000-21379)
10.38 Restated Certificate of Incorporation as amended
(Exhibit 3, Quarterly Report on Form 10-Q, filed August 12,
1999, File No. 000-21379)
10.39 Registration Rights Agreement, dated as of October 15, 1999
between the Company and each person listed on Exhibit A
thereto (Exhibit 10.1, Quarterly Report on Form 10-Q, filed
November 12, 1999, File No. 000-21379)
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10.40 Registration Rights Agreement dated as of January 27, 2000
among the Company and each of the Investors party thereto
(Exhibit 10.1, Registration No. 333-96365)
*10.41 Second Amendment to Amended and Restated 1993 Stock Option
Plan
*10.42 Third Amendment to Amended and Restated 1993 Stock Option
Plan
*10.43 Stock Pledge Agreement dated as of September 25, 1999 by and
between Alan D. Watson and the Company
*10.44 Letter Agreement dated September 25, 1999 between Alan D.
Watson and the Company
*10.45 Secured Promissory Note dated as of September 25, 1999 by
and between Alan D. Watson and the Company
23.1 Consent of PricewaterhouseCoopers LLP
*27 Financial Data Schedule
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- ------------------------
Unless otherwise indicated, all of the above-listed Exhibits are incorporated by
reference from the Company's filing indicated.
+ Confidential Treatment granted: Omitted portions filed separately with the
Commission.
* Previously filed with the Company's Form 10-K filed with the Commission on
March 10, 2000.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
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CUBIST PHARMACEUTICALS, INC.
Dated: March 20, 2000 By: /s/ THOMAS A. SHEA
-----------------------------------------
Thomas A. Shea
Treasurer (Chief Financial Officer)
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-3 (File Nos. 333-33883, 333-64943, 333-90137, 333-96365
and 333-32186) and Forms S-8 (File Nos. 333-65385 and 333-65383) of Cubist
Pharmaceuticals, Inc. (the "Company") of our report dated February 4, 2000
relating to the Company's financial statements, which appears in this
Form 10-K/A.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 17, 2000
